Despite an already strong run, China Hongqiao Group Limited (HKG:1378) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 44%.
Although its price has surged higher, you could still be forgiven for feeling indifferent about China Hongqiao Group's P/E ratio of 8.5x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times have been advantageous for China Hongqiao Group as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.
Does Growth Match The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like China Hongqiao Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 29%. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 13% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be similar to the 15% per annum growth forecast for the broader market.
With this information, we can see why China Hongqiao Group is trading at a fairly similar P/E to the market. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.
What We Can Learn From China Hongqiao Group's P/E?
China Hongqiao Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of China Hongqiao Group's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. It's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with China Hongqiao Group.
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.