Precious Dragon Technology Holdings Limited (HKG:1861) shareholders would be excited to see that the share price has had a great month, posting a 49% gain and recovering from prior weakness. The annual gain comes to 156% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, there still wouldn't be many who think Precious Dragon Technology Holdings' price-to-earnings (or "P/E") ratio of 9.4x is worth a mention when the median P/E in Hong Kong is similar at about 9x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's exceedingly strong of late, Precious Dragon Technology Holdings has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Precious Dragon Technology Holdings

How Is Precious Dragon Technology Holdings' Growth Trending?

In order to justify its P/E ratio, Precious Dragon Technology Holdings would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 130% gain to the company's bottom line. The latest three year period has also seen a 12% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Precious Dragon Technology Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Precious Dragon Technology Holdings' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Precious Dragon Technology Holdings revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Precious Dragon Technology Holdings (2 are significant) you should be aware of.

Of course, you might also be able to find a better stock than Precious Dragon Technology Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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