What Maoyan Entertainment’s (HKG:1896) 30% share price rise doesn’t tell you

Maoyan Entertainment (HKG:1896) Shareholders are no doubt pleased to see the share price up 30% in the last month, although the company is still struggling to make up recently lost ground. Not all shareholders will be happy about this, as the share price is still down a very disappointing 24% in the last twelve months.

Even after such a large jump in price, it is still not an exaggeration to say that Maoyan Entertainment’s price-to-earnings ratio (or “P/E”), currently 9.9, appears to be quite “mediocre” compared to the Hong Kong market brought where the average P/E ratio is around 10x. However, investors may miss a clear opportunity or potential setback if there is no rational basis for the P/E ratio.

Maoyan Entertainment has certainly done a good job recently, as its earnings growth has been stronger than most other companies. It could be that many are expecting the strong earnings performance to fade, which has prevented the P/E ratio from rising. If you like the company, you’re hoping it doesn’t, so you might be able to buy shares even though they’re not entirely popular.

Check out our latest analysis for Maoyan Entertainment

Want to find out how analysts think Maoyan Entertainment’s future compares to the industry? In this case ours free The report is a good start.

Is there some growth for Maoyan Entertainment?

A P/E ratio like Maoyan Entertainment’s can only be seen with a clear conscience if the company’s growth closely follows the market.

Looking back, last year brought an extraordinary 119% increase in profits for the company’s bottom line. Over the last three-year period, the company also posted an excellent 354% overall earnings per share increase thanks to its short-term performance. Therefore, it’s fair to say that the company’s earnings growth has been excellent recently.

Looking ahead, estimates from the 12 analysts covering the company are for earnings to grow 8.1% per year over the next three years. However, growth of 12% per year is forecast for the rest of the market, which is much more attractive.

Given this, it’s strange that Maoyan Entertainment’s P/E ratio is in line with most other companies. It appears that most investors are ignoring the relatively limited growth expectations and are willing to pay for exposure to the stock. It will be difficult to maintain these prices as this earnings growth will eventually weigh on stocks.

The last word

Maoyan Entertainment stock has had a lot of momentum recently, which has resulted in its P/E ratio being in line with the market. We would say that the price-to-earnings ratio is not primarily a valuation tool, but rather is used to measure current investor sentiment and future expectations.

Our review of Maoyan Entertainment’s analyst forecasts found that the weaker earnings outlook isn’t impacting its P/E ratio as much as we would have expected. At the moment, we are unhappy with the P/E ratio as projected future earnings are unlikely to support more positive sentiment for long. This puts shareholders’ investments at risk and potential investors risk paying an unnecessary premium.

Many other important risk factors can be found on the company’s balance sheet. Take a look at ours free Balance sheet analysis for Maoyan Entertainment with six simple reviews of some of these key factors.

Naturally, You might also find a better stock than Maoyan Entertainment. Maybe you would like to see this free Collection of other companies that have reasonable P/E ratios and have grown profits significantly.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.