Getting In Cheap On Luyuan Group Holding (Cayman) Limited (HKG:2451) Is Unlikely

Luyuan Group Holding (Cayman) Limited's (HKG:2451) price-to-earnings (or "P/E") ratio of 15.4x 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 9x and even P/E's below 5x 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.

Luyuan Group Holding (Cayman) has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Luyuan Group Holding (Cayman)

Although there are no analyst estimates available for Luyuan Group Holding (Cayman), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Luyuan Group Holding (Cayman)'s Growth Trending?

In order to justify its P/E ratio, Luyuan Group Holding (Cayman) would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Still, incredibly EPS has fallen 73% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's an unpleasant look.

In light of this, it's alarming that Luyuan Group Holding (Cayman)'s P/E sits above the majority of other companies. 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.

What We Can Learn From Luyuan Group Holding (Cayman)'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 Luyuan Group Holding (Cayman) 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. 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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Luyuan Group Holding (Cayman) (1 is concerning!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Luyuan Group Holding (Cayman), 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com