Despite an already strong run, Chuan Holdings Limited (HKG:1420) shares have been powering on, with a gain of 32% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.0% over the last year.

Even after such a large jump in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may still consider Chuan Holdings as an attractive investment with its 6.6x 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 earnings growth that's exceedingly strong of late, Chuan Holdings has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

How Is Chuan Holdings' Growth Trending?

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

If we review the last year of earnings growth, the company posted a terrific increase of 88%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

In light of this, it's understandable that Chuan Holdings' P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Key Takeaway

The latest share price surge wasn't enough to lift Chuan Holdings' P/E close to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Chuan Holdings revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Chuan Holdings is showing 4 warning signs in our investment analysis, and 1 of those is potentially serious.

If you're unsure about the strength of Chuan Holdings' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com