Hebei Broadcasting Wireless Media Co., Ltd.'s (SZSE:301551) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

To the annoyance of some shareholders, Hebei Broadcasting Wireless Media Co., Ltd. (SZSE:301551) shares are down a considerable 26% in the last month, which continues a horrid run for the company. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Even after such a large drop in price, Hebei Broadcasting Wireless Media's price-to-earnings (or "P/E") ratio of 78.6x 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 33x and even P/E's below 19x are quite common. 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 Hebei Broadcasting Wireless Media'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.

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What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Hebei Broadcasting Wireless Media's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 36% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hebei Broadcasting Wireless Media is trading at a P/E higher than the market. 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Hebei Broadcasting Wireless Media's shares may have retreated, but its P/E is still flying high. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Hebei Broadcasting Wireless Media 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Hebei Broadcasting Wireless Media is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Hebei Broadcasting Wireless Media, 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.