Yue Da International Holdings Limited (HKG:629) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last month tops off a massive increase of 158% in the last year.
After such a large jump in price, Yue Da International Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 13.8x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 5x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
As an illustration, earnings have deteriorated at Yue Da International Holdings over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Yue Da International Holdings
How Is Yue Da International Holdings' Growth Trending?
Yue Da International Holdings' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered a frustrating 54% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 28% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that Yue Da International Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
Yue Da International Holdings' P/E is flying high just like its stock has during the last month. 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.
We've established that Yue Da International Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 4 warning signs for Yue Da International Holdings you should be aware of, and 2 of them make us uncomfortable.
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.