Shanghai Pioneer Holding Ltd (HKG:1345) shareholders have had their patience rewarded with a 25% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 33%.
Following the firm bounce in price, Shanghai Pioneer Holding may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 16.2x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
For instance, Shanghai Pioneer Holding's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
See our latest analysis for Shanghai Pioneer Holding
Is There Enough Growth For Shanghai Pioneer Holding?
The only time you'd be truly comfortable seeing a P/E as steep as Shanghai Pioneer Holding's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 87% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
It's interesting to note that the rest of the market is similarly expected to grow by 23% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
With this information, we find it interesting that Shanghai Pioneer Holding is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
What We Can Learn From Shanghai Pioneer Holding's P/E?
The strong share price surge has got Shanghai Pioneer Holding's P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Shanghai Pioneer Holding currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Shanghai Pioneer Holding with six simple checks will allow you to discover any risks that could be an issue.
You might be able to find a better investment than Shanghai Pioneer Holding. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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.