Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) shares have had a really impressive month, gaining 27% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.7% in the last twelve months.

In spite of the firm bounce 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 Hong Kong Shanghai Alliance Holdings as a highly attractive investment with its 2.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

For example, consider that Hong Kong Shanghai Alliance Holdings' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Hong Kong Shanghai Alliance Holdings' P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's bottom line. Even so, admirably EPS has lifted 4,644% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

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

With this information, we find it odd that Hong Kong Shanghai Alliance Holdings is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Hong Kong Shanghai Alliance Holdings' P/E

Even after such a strong price move, Hong Kong Shanghai Alliance Holdings' P/E still trails the rest of the market significantly. 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.

Our examination of Hong Kong Shanghai Alliance Holdings revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings 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 the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware Hong Kong Shanghai Alliance Holdings is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

Of course, you might also be able to find a better stock than Hong Kong Shanghai Alliance 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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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.