Further Upside For Precious Dragon Technology Holdings Limited (HKG:1861) Shares Could Introduce Price Risks After 32% Bounce

Precious Dragon Technology Holdings Limited (HKG:1861) shares have continued their recent momentum with a 32% gain in the last month alone. 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, you could still be forgiven for feeling indifferent about Precious Dragon Technology Holdings' P/E ratio of 10.2x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

As an illustration, earnings have deteriorated at Precious Dragon Technology Holdings over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Precious Dragon Technology Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Precious Dragon Technology Holdings will help you shine a light on its historical performance.

Does Growth Match The P/E?

Precious Dragon Technology Holdings' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. Still, the latest three year period has seen an excellent 88% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 19% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Precious Dragon Technology Holdings is trading at a fairly similar P/E to the market. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

The Key Takeaway

Its shares have lifted substantially and now Precious Dragon Technology Holdings' P/E is also back up 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.

Our examination of Precious Dragon Technology Holdings revealed its three-year earnings trends aren't contributing to its P/E as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued if recent medium-term earnings trends continue, but investors seem to think future earnings could see some volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Precious Dragon Technology Holdings that you need to be mindful of.

If you're unsure about the strength of Precious Dragon Technology Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.