Further Upside For Zengame Technology Holding Limited (HKG:2660) Shares Could Introduce Price Risks After 31% Bounce

Despite an already strong run, Zengame Technology Holding Limited (HKG:2660) shares have been powering on, with a gain of 31% in the last thirty days. The last month tops off a massive increase of 205% in the last year.

Even after such a large jump in price, Zengame Technology Holding's price-to-earnings (or "P/E") ratio of 5.6x 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 9x and even P/E's above 19x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Zengame Technology Holding has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Zengame Technology Holding

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 Zengame Technology Holding's earnings, revenue and cash flow.

How Is Zengame Technology Holding's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Zengame Technology Holding's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 286% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Zengame Technology Holding is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Zengame Technology Holding's P/E

Zengame Technology Holding's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Zengame Technology Holding currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Zengame Technology Holding, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Zengame Technology Holding, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.