There's Reason For Concern Over Chongqing Yukaifa Co., Ltd's (SZSE:000514) Massive 25% Price Jump

Despite an already strong run, Chongqing Yukaifa Co., Ltd (SZSE:000514) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 29%.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Chongqing Yukaifa as a stock to avoid entirely with its 73.6x P/E ratio. 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.

As an illustration, earnings have deteriorated at Chongqing Yukaifa over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Chongqing Yukaifa

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Chongqing Yukaifa will help you shine a light on its historical performance.

Is There Enough Growth For Chongqing Yukaifa?

Chongqing Yukaifa'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 64%. The last three years don't look nice either as the company has shrunk EPS by 23% 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 41% 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 Chongqing Yukaifa 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. 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 Key Takeaway

Chongqing Yukaifa's P/E is flying high just like its stock has during the last month. 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.

We've established that Chongqing Yukaifa currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Chongqing Yukaifa (1 can't be ignored!) that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.