Unpleasant Surprises Could Be In Store For King's Flair International (Holdings) Limited's (HKG:6822) Shares

King's Flair International (Holdings) Limited's (HKG:6822) price-to-earnings (or "P/E") ratio of 20.1x 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 8x and even P/E's below 4x 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.

For instance, King's Flair International (Holdings)'s receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for King's Flair International (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's Flair International (Holdings)'s earnings, revenue and cash flow.

How Is King's Flair International (Holdings)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as King's Flair International (Holdings)'s is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 66%. As a result, earnings from three years ago have also fallen 80% 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 23% 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 King's Flair International (Holdings) 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

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.

Our examination of King's Flair International (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. 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 4 warning signs for King's Flair International (Holdings) (1 can't be ignored!) that we have uncovered.

If you're unsure about the strength of King's Flair International (Holdings)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.