To the annoyance of some shareholders, Guangdong Join-Share Financing Guarantee Investment Co., Ltd. (HKG:1543) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 49% share price drop.
In spite of the heavy fall in price, Guangdong Join-Share Financing Guarantee Investment may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 13.3x, since almost half of all companies in Hong Kong have P/E ratios under 9x 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 as high as it is.
The earnings growth achieved at Guangdong Join-Share Financing Guarantee Investment over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Guangdong Join-Share Financing Guarantee Investment
How Is Guangdong Join-Share Financing Guarantee Investment's Growth Trending?
In order to justify its P/E ratio, Guangdong Join-Share Financing Guarantee Investment would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a worthy increase of 10%. Still, lamentably EPS has fallen 59% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.
In light of this, it's alarming that Guangdong Join-Share Financing Guarantee Investment's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
The Key Takeaway
Guangdong Join-Share Financing Guarantee Investment's P/E hasn't come down all the way after its stock plunged. 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 Guangdong Join-Share Financing Guarantee Investment revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.
Before you settle on your opinion, we've discovered 4 warning signs for Guangdong Join-Share Financing Guarantee Investment (1 doesn't sit too well with us!) that you should be aware of.
Of course, you might also be able to find a better stock than Guangdong Join-Share Financing Guarantee Investment. 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.