Some China Chengtong Development Group Limited (HKG:217) Shareholders Look For Exit As Shares Take 27% Pounding

China Chengtong Development Group Limited (HKG:217) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Indeed, the recent drop has reduced its annual gain to a relatively sedate 2.4% over the last twelve months.

In spite of the heavy fall in price, China Chengtong Development Group may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 35.5x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. 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.

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As an illustration, earnings have deteriorated at China Chengtong Development Group 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for China Chengtong Development Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China Chengtong Development Group's earnings, revenue and cash flow.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like China Chengtong Development Group's to be considered reasonable.

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 61%. The last three years don't look nice either as the company has shrunk EPS by 70% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 20% 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 China Chengtong Development Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Final Word

Even after such a strong price drop, China Chengtong Development Group's P/E still exceeds the rest of the market significantly. 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 China Chengtong Development Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

It is also worth noting that we have found 5 warning signs for China Chengtong Development Group (2 make us uncomfortable!) that you need to take into consideration.

If these risks are making you reconsider your opinion on China Chengtong Development Group, 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.