Optimistic Investors Push APAC Resources Limited (HKG:1104) Shares Up 28% But Growth Is Lacking

Despite an already strong run, APAC Resources Limited (HKG:1104) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 119% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that APAC Resources' price-to-earnings (or "P/E") ratio of 12.6x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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For example, consider that APAC Resources' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for APAC Resources

Although there are no analyst estimates available for APAC Resources, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like APAC Resources' is when the company's growth is tracking the market closely.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that APAC Resources' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now APAC Resources' P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that APAC Resources currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for APAC Resources that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.