H World Group Limited's (NASDAQ:HTHT) Shares Climb 28% But Its Business Is Yet to Catch Up

H World Group Limited (NASDAQ:HTHT) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 3.2% isn't as attractive.

Following the firm bounce in price, given around half the companies in the United States have price-to-earnings ratios (or "P/E's") below 18x, you may consider H World Group as a stock to potentially avoid with its 22.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

H World Group certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as H World Group's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 225%. The strong recent performance means it was also able to grow EPS by 497% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 10% per annum during the coming three years according to the analysts following the company. That's shaping up to be similar to the 10% per year growth forecast for the broader market.

With this information, we find it interesting that H World Group is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On H World Group's P/E

H World Group's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that H World Group currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware H World Group is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of H World Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.