The Market Lifts GreenTree Hospitality Group Ltd. (NYSE:GHG) Shares 27% But It Can Do More

Despite an already strong run, GreenTree Hospitality Group Ltd. (NYSE:GHG) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Although its price has surged higher, given about half the companies in the United States have price-to-earnings ratios (or "P/E's") above 19x, you may still consider GreenTree Hospitality Group as an attractive investment with its 9.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, GreenTree Hospitality Group has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for GreenTree Hospitality Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on GreenTree Hospitality Group.

Does Growth Match The Low P/E?

In order to justify its P/E ratio, GreenTree Hospitality Group would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered an exceptional 69% gain to the company's bottom line. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 20% each year during the coming three years according to the lone analyst following the company. With the market only predicted to deliver 10% per annum, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that GreenTree Hospitality Group's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From GreenTree Hospitality Group's P/E?

The latest share price surge wasn't enough to lift GreenTree Hospitality Group's P/E close to the market median. 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 GreenTree Hospitality Group currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It is also worth noting that we have found 1 warning sign for GreenTree Hospitality Group that you need to take into consideration.

If you're unsure about the strength of GreenTree Hospitality 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.