Guangdong Hongxing Industrial Co., Ltd.'s (SZSE:001209) Share Price Boosted 28% But Its Business Prospects Need A Lift Too

Guangdong Hongxing Industrial Co., Ltd. (SZSE:001209) shareholders have had their patience rewarded with a 28% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Although its price has surged higher, Guangdong Hongxing Industrial may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.3x, since almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 70x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Recent times have been quite advantageous for Guangdong Hongxing Industrial as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Guangdong Hongxing Industrial

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

Is There Any Growth For Guangdong Hongxing Industrial?

In order to justify its P/E ratio, Guangdong Hongxing Industrial would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 135% gain to the company's bottom line. Still, incredibly EPS has fallen 49% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Guangdong Hongxing Industrial is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Guangdong Hongxing Industrial's P/E

Guangdong Hongxing Industrial's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Guangdong Hongxing Industrial maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Guangdong Hongxing Industrial (of which 2 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Guangdong Hongxing Industrial, 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.