Optimistic Investors Push JiaChen Holding Group Limited (HKG:1937) Shares Up 102% But Growth Is Lacking

JiaChen Holding Group Limited (HKG:1937) shares have had a really impressive month, gaining 102% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider JiaChen Holding Group as a stock to avoid entirely with its 32.1x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

JiaChen Holding Group certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for JiaChen Holding Group

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

How Is JiaChen Holding Group's Growth Trending?

In order to justify its P/E ratio, JiaChen Holding Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. The latest three year period has also seen an excellent 68% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that JiaChen Holding Group 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

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

JiaChen Holding Group's P/E is flying high just like its stock has during the last month. 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.

We've established that JiaChen Holding Group currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

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

If you're unsure about the strength of JiaChen Holding Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.