Investor Optimism Abounds Tongcheng Travel Holdings Limited (HKG:780) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 19.4x Tongcheng Travel Holdings Limited (HKG:780) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. 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.

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With earnings growth that's superior to most other companies of late, Tongcheng Travel Holdings has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Tongcheng Travel Holdings

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tongcheng Travel Holdings.

Is There Enough Growth For Tongcheng Travel Holdings?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 49% last year. The latest three year period has also seen an excellent 921% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 9.8% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 13% each year, which is noticeably more attractive.

In light of this, it's alarming that Tongcheng Travel Holdings' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Tongcheng Travel Holdings currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Tongcheng Travel Holdings with six simple checks.

Of course, you might also be able to find a better stock than Tongcheng Travel Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.