Risks To Shareholder Returns Are Elevated At These Prices For Zhongshen Jianye Holding Limited (HKG:2503)

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Zhongshen Jianye Holding Limited (HKG:2503) as a stock to avoid entirely with its 14.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Zhongshen Jianye Holding 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Zhongshen Jianye Holding

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 Zhongshen Jianye Holding's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Zhongshen Jianye Holding would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 26% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 100% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Zhongshen Jianye Holding's P/E sits above the majority of other companies. 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 Key Takeaway

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 Zhongshen Jianye Holding 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. 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.

Before you take the next step, you should know about the 3 warning signs for Zhongshen Jianye Holding that we have uncovered.

You might be able to find a better investment than Zhongshen Jianye Holding. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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