Hoe Leong Corporation Ltd. (SGX:H20) shareholders have had their patience rewarded with a 100% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 100%.

Following the firm bounce in price, given around half the companies in Singapore have price-to-earnings ratios (or "P/E's") below 12x, you may consider Hoe Leong as a stock to potentially avoid with its 16.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Hoe Leong has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Hoe Leong

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hoe Leong's earnings, revenue and cash flow.

How Is Hoe Leong's Growth Trending?

In order to justify its P/E ratio, Hoe Leong would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 256% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 9.4% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Hoe Leong is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Hoe Leong's P/E?

Hoe Leong shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hoe Leong currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hoe Leong you should be aware of, and 1 of them doesn't sit too well with us.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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