Edvance International Holdings Limited's (HKG:1410) 38% Share Price Surge Not Quite Adding Up

Edvance International Holdings Limited (HKG:1410) shareholders have had their patience rewarded with a 38% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Edvance International Holdings' P/E ratio of 11.9x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 13x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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For instance, Edvance International Holdings' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Edvance International Holdings

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

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

The only time you'd be comfortable seeing a P/E like Edvance International Holdings' is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 7.9% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Edvance International Holdings' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Edvance International Holdings' P/E?

Its shares have lifted substantially and now Edvance International Holdings' P/E is also back up to the market median. 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.

Our examination of Edvance International Holdings revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Edvance International Holdings (of which 1 is a bit concerning!) you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.