A Piece Of The Puzzle Missing From Guan Chao Holdings Limited's (HKG:1872) 132% Share Price Climb

Guan Chao Holdings Limited (HKG:1872) shares have had a really impressive month, gaining 132% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

Even after such a large jump in price, Guan Chao Holdings' price-to-earnings (or "P/E") ratio of 2.1x might still make it look like a strong buy right now compared to the market in Hong Kong, where around half of the companies have P/E ratios above 10x and even P/E's above 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Recent times have been quite advantageous for Guan Chao Holdings as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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.

Check out our latest analysis for Guan Chao Holdings

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

How Is Guan Chao Holdings' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 54%. The strong recent performance means it was also able to grow EPS by 99% in total over the last three years. Accordingly, shareholders would have probably welcomed those 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 odd that Guan Chao Holdings 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 Guan Chao Holdings' P/E

Even after such a strong price move, Guan Chao Holdings' P/E still trails the rest of the market significantly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Guan Chao Holdings 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. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Don't forget that there may be other risks. For instance, we've identified 5 warning signs for Guan Chao Holdings (1 doesn't sit too well with us) you should be aware of.

Of course, you might also be able to find a better stock than Guan Chao 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.

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