To the annoyance of some shareholders, Lapco Holdings Limited (HKG:8472) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.

Although its price has dipped substantially, Lapco Holdings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4x, since almost half of all companies in Hong Kong have P/E ratios greater than 9x and even P/E's higher than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

The earnings growth achieved at Lapco Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Lapco Holdings' is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered an exceptional 25% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 177% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Lapco Holdings is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Having almost fallen off a cliff, Lapco Holdings' share price has pulled its P/E way down as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Lapco Holdings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It is also worth noting that we have found 5 warning signs for Lapco Holdings (3 make us uncomfortable!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Lapco Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.