There's No Escaping China Hongqiao Group Limited's (HKG:1378) Muted Earnings Despite A 25% Share Price Rise

Despite an already strong run, China Hongqiao Group Limited (HKG:1378) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 138% in the last year.

Although its price has surged higher, China Hongqiao Group's price-to-earnings (or "P/E") ratio of 8.7x might still make it look like a buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 13x and even P/E's above 26x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

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With earnings growth that's superior to most other companies of late, China Hongqiao Group has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

See our latest analysis for China Hongqiao Group

Keen to find out how analysts think China Hongqiao Group's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as China Hongqiao Group's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 41% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 55% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 0.8% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 14% growth each year, the company is positioned for a weaker earnings result.

With this information, we can see why China Hongqiao Group is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From China Hongqiao Group's P/E?

The latest share price surge wasn't enough to lift China Hongqiao Group's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that China Hongqiao Group maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for China Hongqiao Group with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than China Hongqiao Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.