Haidilao International Holding Ltd.'s (HKG:6862) Share Price Could Signal Some Risk

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider Haidilao International Holding Ltd. (HKG:6862) as a stock to potentially avoid with its 15.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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Recent earnings growth for Haidilao International Holding has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Haidilao International Holding

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Is There Enough Growth For Haidilao International Holding?

Haidilao International Holding's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 3.5%. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 10% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per year, which is noticeably more attractive.

In light of this, it's alarming that Haidilao International Holding's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

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 Haidilao International Holding'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. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Haidilao International Holding is showing 1 warning sign in our investment analysis, you should know about.

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

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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.