Unpleasant Surprises Could Be In Store For Eternal Asia Supply Chain Management Ltd.'s (SZSE:002183) Shares

With a price-to-earnings (or "P/E") ratio of 66.5x Eternal Asia Supply Chain Management Ltd. (SZSE:002183) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x 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 example, consider that Eternal Asia Supply Chain Management's financial performance has been poor lately as its earnings have been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Eternal Asia Supply Chain Management

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How Is Eternal Asia Supply Chain Management's Growth Trending?

In order to justify its P/E ratio, Eternal Asia Supply Chain Management would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 50% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Eternal Asia Supply Chain Management is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Eternal Asia Supply Chain Management's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Eternal Asia Supply Chain Management 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 3 warning signs for Eternal Asia Supply Chain Management you should be aware of, and 1 of them is a bit unpleasant.

If these risks are making you reconsider your opinion on Eternal Asia Supply Chain Management, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.