There's No Escaping Wuhan Youji Holdings Ltd.'s (HKG:2881) Muted Earnings Despite A 35% Share Price Rise

The Wuhan Youji Holdings Ltd. (HKG:2881) share price has done very well over the last month, posting an excellent gain of 35%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Even after such a large jump in price, Wuhan Youji Holdings may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 5.3x, since almost half of all companies in Hong Kong have P/E ratios greater than 11x and even P/E's higher than 23x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Wuhan Youji Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 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.

View our latest analysis for Wuhan Youji Holdings

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What Are Growth Metrics Telling Us About The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Wuhan Youji Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. Still, incredibly EPS has fallen 68% 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 18% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Wuhan Youji Holdings' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Wuhan Youji Holdings' P/E

Even after such a strong price move, Wuhan Youji Holdings' P/E still trails the rest of the market significantly. 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 Wuhan Youji Holdings 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Wuhan Youji Holdings you should know about.

If you're unsure about the strength of Wuhan Youji Holdings' 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.