Tongcheng Travel Holdings Limited's (HKG:780) 35% Price Boost Is Out Of Tune With Earnings

The Tongcheng Travel Holdings Limited (HKG:780) share price has done very well over the last month, posting an excellent gain of 35%. The last 30 days bring the annual gain to a very sharp 35%.

After such a large jump in price, Tongcheng Travel Holdings' price-to-earnings (or "P/E") ratio of 26.5x 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 10x and even P/E's below 6x 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.

With earnings growth that's superior to most other companies of late, Tongcheng Travel Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. 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.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Tongcheng Travel Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 164% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 96% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 14% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 12% growth per year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Tongcheng Travel Holdings is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

The strong share price surge has got Tongcheng Travel Holdings' P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Tongcheng Travel Holdings' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Tongcheng Travel Holdings that we have uncovered.

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.