China Hanking Holdings Limited (HKG:3788) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

China Hanking Holdings Limited (HKG:3788) shareholders have had their patience rewarded with a 32% share price jump in the last month. 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, you could still be forgiven for feeling indifferent about China Hanking Holdings' P/E ratio of 11.1x, 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.

Our free stock report includes 2 warning signs investors should be aware of before investing in China Hanking Holdings. Read for free now.

Earnings have risen firmly for China Hanking Holdings recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for China Hanking Holdings

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

How Is China Hanking Holdings' Growth Trending?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 72% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 18% shows it's an unpleasant look.

With this information, we find it concerning that China Hanking Holdings is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

China Hanking Holdings appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 China Hanking Holdings currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You need to take note of risks, for example - China Hanking Holdings has 2 warning signs (and 1 which is concerning) we think you should know about.

Of course, you might also be able to find a better stock than China Hanking Holdings. 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.