What Kwan Yong Holdings Limited's (HKG:9998) 28% Share Price Gain Is Not Telling You

Kwan Yong Holdings Limited (HKG:9998) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 4.5% isn't as attractive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Kwan Yong Holdings' P/E ratio of 11.7x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

It looks like earnings growth has deserted Kwan Yong Holdings recently, which is not something to boast about. One possibility is that the P/E is moderate because investors think this benign earnings growth rate might not be enough to outperform the broader market in the near future. 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.

See our latest analysis for Kwan Yong Holdings

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 Kwan Yong Holdings' earnings, revenue and cash flow.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Kwan Yong Holdings' to be considered reasonable.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 72% overall from three years ago. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 24% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Kwan Yong Holdings' 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

What We Can Learn From Kwan Yong Holdings' P/E?

Its shares have lifted substantially and now Kwan Yong Holdings' 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 Kwan Yong Holdings currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Kwan Yong Holdings that you should be aware of.

You might be able to find a better investment than Kwan Yong Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.