King Of Catering (Global) Holdings Ltd.'s (HKG:8619) 41% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

King Of Catering (Global) Holdings Ltd. (HKG:8619) shares have retraced a considerable 41% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 257%.

Although its price has dipped substantially, King Of Catering (Global) Holdings' price-to-earnings (or "P/E") ratio of 55.8x might still 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

King Of Catering (Global) Holdings certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for King Of Catering (Global) Holdings

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 King Of Catering (Global) Holdings' earnings, revenue and cash flow.

Is There Enough Growth For King Of Catering (Global) Holdings?

In order to justify its P/E ratio, King Of Catering (Global) Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 96% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 59% overall. 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 19% shows it's an unpleasant look.

With this information, we find it concerning that King Of Catering (Global) Holdings 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 Bottom Line On King Of Catering (Global) Holdings' P/E

King Of Catering (Global) Holdings' shares may have retreated, but its P/E is still flying high. 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 King Of Catering (Global) Holdings 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with King Of Catering (Global) Holdings (at least 2 which are concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on King Of Catering (Global) Holdings, 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.