Geely Automobile Holdings Limited's (HKG:175) 25% Share Price Surge Not Quite Adding Up

Geely Automobile Holdings Limited (HKG:175) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 72%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Geely Automobile Holdings' P/E ratio of 9.5x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 11x. 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.

Geely Automobile Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Geely Automobile Holdings

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

There's an inherent assumption that a company should be matching the market for P/E ratios like Geely Automobile Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 219% last year. Pleasingly, EPS has also lifted 240% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 7.9% each year over the next three years. With the market predicted to deliver 15% growth each year, the company is positioned for a weaker earnings result.

In light of this, it's curious that Geely Automobile Holdings' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Geely Automobile Holdings' P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Geely Automobile Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Geely Automobile Holdings has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Geely Automobile Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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

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.