Improved Earnings Required Before Hennessy Advisors, Inc. (NASDAQ:HNNA) Stock's 46% Jump Looks Justified

The Hennessy Advisors, Inc. (NASDAQ:HNNA) share price has done very well over the last month, posting an excellent gain of 46%. The last 30 days bring the annual gain to a very sharp 58%.

Although its price has surged higher, Hennessy Advisors' price-to-earnings (or "P/E") ratio of 13.9x might still make it look like a buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 18x and even P/E's above 32x 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 limited.

Earnings have risen firmly for Hennessy Advisors recently, which is pleasing to see. 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.

View our latest analysis for Hennessy Advisors

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

Does Growth Match 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.

If we review the last year of earnings growth, the company posted a terrific increase of 26%. However, this wasn't enough as the latest three year period has seen a very unpleasant 21% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 15% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Hennessy Advisors' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Hennessy Advisors' P/E?

The latest share price surge wasn't enough to lift Hennessy Advisors' P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hennessy Advisors maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Hennessy Advisors (1 can't be ignored!) that you need to be mindful of.

If you're unsure about the strength of Hennessy Advisors' 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.