Changhua Holding Group Co., Ltd.'s (SHSE:605018) Shares Climb 25% But Its Business Is Yet to Catch Up

Despite an already strong run, Changhua Holding Group Co., Ltd. (SHSE:605018) shares have been powering on, with a gain of 25% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.9% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Changhua Holding Group's P/E ratio of 34.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 36x. 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.

With earnings growth that's exceedingly strong of late, Changhua Holding Group has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Changhua Holding Group

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 Changhua Holding Group's earnings, revenue and cash flow.

Is There Some Growth For Changhua Holding Group?

In order to justify its P/E ratio, Changhua Holding Group would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 44%. However, this wasn't enough as the latest three year period has seen a very unpleasant 37% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Changhua Holding Group's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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 the recent negative growth rates.

What We Can Learn From Changhua Holding Group's P/E?

Its shares have lifted substantially and now Changhua Holding Group's P/E is also back up to the market median. 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.

Our examination of Changhua Holding Group revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Changhua Holding Group is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

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

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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.