Those holding Topsports International Holdings Limited (HKG:6110) shares would be relieved that the share price has rebounded 49% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 31% over that time.

Although its price has surged higher, it's still not a stretch to say that Topsports International Holdings' price-to-earnings (or "P/E") ratio of 10.1x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 10x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Topsports International Holdings as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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 not quite in favour.

Check out our latest analysis for Topsports International Holdings

Keen to find out how analysts think Topsports International Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Topsports International Holdings' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Topsports International Holdings' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 20% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 2.5% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% per year, which is noticeably more attractive.

With this information, we find it interesting that Topsports International Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Topsports International Holdings' P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Topsports International Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Topsports International Holdings you should know about.

If these risks are making you reconsider your opinion on Topsports International Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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