Western Regions Tourism Development Co.,Ltd's (SZSE:300859) Share Price Is Still Matching Investor Opinion Despite 26% Slump

Western Regions Tourism Development Co.,Ltd (SZSE:300859) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 19%.

Even after such a large drop in price, Western Regions Tourism DevelopmentLtd's price-to-earnings (or "P/E") ratio of 52.8x might still make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 19x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Western Regions Tourism DevelopmentLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Western Regions Tourism DevelopmentLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Western Regions Tourism DevelopmentLtd.

Does Growth Match The High P/E?

Western Regions Tourism DevelopmentLtd's 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.

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 15%. Still, the latest three year period has seen an excellent 147% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 73% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Western Regions Tourism DevelopmentLtd 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 Bottom Line On Western Regions Tourism DevelopmentLtd's P/E

Even after such a strong price drop, Western Regions Tourism DevelopmentLtd's P/E still exceeds the rest of the market significantly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Western Regions Tourism DevelopmentLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Western Regions Tourism DevelopmentLtd is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

If these risks are making you reconsider your opinion on Western Regions Tourism DevelopmentLtd, 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.