What HireQuest, Inc.'s (NASDAQ:HQI) 26% Share Price Gain Is Not Telling You

HireQuest, Inc. (NASDAQ:HQI) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think HireQuest's price-to-earnings (or "P/E") ratio of 20.8x is worth a mention when the median P/E in the United States is similar at about 19x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Recent times have been advantageous for HireQuest as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

See our latest analysis for HireQuest

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

The only time you'd be comfortable seeing a P/E like HireQuest's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 247% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 40% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 8.6% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is noticeably more attractive.

With this information, we find it interesting that HireQuest is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From HireQuest's P/E?

HireQuest appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 HireQuest's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for HireQuest with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.