China Art Financial Holdings Limited's (HKG:1572) 68% Price Boost Is Out Of Tune With Earnings

China Art Financial Holdings Limited (HKG:1572) shareholders would be excited to see that the share price has had a great month, posting a 68% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 10% in the last twelve months.

Since its price has surged higher, China Art Financial Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 42.7x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x 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.

Our free stock report includes 4 warning signs investors should be aware of before investing in China Art Financial Holdings. Read for free now.

As an illustration, earnings have deteriorated at China Art Financial Holdings over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for China Art Financial Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Art Financial Holdings will help you shine a light on its historical performance.

Is There Enough Growth For China Art Financial Holdings?

There's an inherent assumption that a company should far outperform the market for P/E ratios like China Art Financial Holdings' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 59%. As a result, earnings from three years ago have also fallen 82% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 18% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that China Art Financial Holdings' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Bottom Line On China Art Financial Holdings' P/E

China Art Financial Holdings' P/E is flying high just like its stock has during the last month. 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.

Our examination of China Art Financial 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware China Art Financial Holdings is showing 4 warning signs in our investment analysis, and 2 of those are concerning.

Of course, you might also be able to find a better stock than China Art Financial 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.