Risks To Shareholder Returns Are Elevated At These Prices For Shenzhen Pagoda Industrial (Group) Corporation Limited (HKG:2411)

Shenzhen Pagoda Industrial (Group) Corporation Limited's (HKG:2411) price-to-earnings (or "P/E") ratio of 25.4x 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 9x and even P/E's below 5x are quite common. 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.

Recent times have been pleasing for Shenzhen Pagoda Industrial (Group) as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Shenzhen Pagoda Industrial (Group)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Pagoda Industrial (Group).

How Is Shenzhen Pagoda Industrial (Group)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Shenzhen Pagoda Industrial (Group)'s is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 40% gain to the company's bottom line. As a result, it also grew EPS by 22% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 2.1% during the coming year according to the three analysts following the company. That's shaping up to be materially lower than the 24% growth forecast for the broader market.

With this information, we find it concerning that Shenzhen Pagoda Industrial (Group) is trading at a P/E higher than the market. 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.

What We Can Learn From Shenzhen Pagoda Industrial (Group)'s P/E?

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.

Our examination of Shenzhen Pagoda Industrial (Group)'s analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. 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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shenzhen Pagoda Industrial (Group) with six simple checks.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.