Risks To Shareholder Returns Are Elevated At These Prices For Haitian International Holdings Limited (HKG:1882)

With a price-to-earnings (or "P/E") ratio of 11.3x Haitian International Holdings Limited (HKG:1882) may be sending bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 4x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Haitian International Holdings has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Haitian International Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Haitian International Holdings.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Haitian International Holdings would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 24% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 10% per annum over the next three years. With the market predicted to deliver 16% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that Haitian International Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Haitian International Holdings currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Haitian International Holdings with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Haitian International Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.