What Sino Gas Holdings Group Limited's (HKG:1759) 47% Share Price Gain Is Not Telling You

Sino Gas Holdings Group Limited (HKG:1759) shareholders have had their patience rewarded with a 47% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

After such a large jump in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Sino Gas Holdings Group as a stock to potentially avoid with its 11.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Earnings have risen at a steady rate over the last year for Sino Gas Holdings Group, which is generally not a bad outcome. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform 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 Sino Gas Holdings Group

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 Sino Gas Holdings Group's earnings, revenue and cash flow.

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

Sino Gas Holdings Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 2.7% gain to the company's bottom line. Still, lamentably EPS has fallen 35% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 22% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Sino Gas Holdings Group is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Sino Gas Holdings Group's P/E

Sino Gas Holdings Group's P/E is getting right up there since its shares have risen strongly. 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 Sino Gas Holdings Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Sino Gas Holdings Group is showing 5 warning signs in our investment analysis, and 3 of those make us uncomfortable.

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