Yadea Group Holdings Ltd.'s (HKG:1585) price-to-earnings (or "P/E") ratio of 30.4x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. 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.
Yadea Group Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
See our latest analysis for Yadea Group Holdings
Is There Enough Growth For Yadea Group Holdings?
The only time you'd be truly comfortable seeing a P/E as steep as Yadea Group Holdings' is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 52%. This means it has also seen a slide in earnings over the longer-term as EPS is down 13% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 47% each year during the coming three years according to the twelve analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 15% per annum, which is noticeably less attractive.
With this information, we can see why Yadea Group Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
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.
As we suspected, our examination of Yadea Group Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
It is also worth noting that we have found 1 warning sign for Yadea Group Holdings that you need to take into consideration.
If you're unsure about the strength of Yadea Group Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.