Hennessy Advisors, Inc.'s (NASDAQ:HNNA) Shares Bounce 25% But Its Business Still Trails The Market

Despite an already strong run, Hennessy Advisors, Inc. (NASDAQ:HNNA) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 98% in the last year.

Even after such a large jump in price, Hennessy Advisors may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 16.1x, since almost half of all companies in the United States have P/E ratios greater than 20x and even P/E's higher than 36x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

Hennessy Advisors has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Check out our latest analysis for Hennessy Advisors

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 Hennessy Advisors' earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered an exceptional 26% gain to the company's bottom line. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 15% shows it's an unpleasant look.

In light of this, it's understandable that Hennessy Advisors' P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Bottom Line On Hennessy Advisors' P/E

The latest share price surge wasn't enough to lift Hennessy Advisors' P/E close 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.

As we suspected, our examination of Hennessy Advisors revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Hennessy Advisors (1 is a bit unpleasant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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