More Unpleasant Surprises Could Be In Store For Yue Da International Holdings Limited's (HKG:629) Shares After Tumbling 28%

To the annoyance of some shareholders, Yue Da International Holdings Limited (HKG:629) shares are down a considerable 28% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 48% in the last year.

In spite of the heavy fall in price, Yue Da International Holdings' price-to-earnings (or "P/E") ratio of 11.4x might still make it look like a 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Yue Da International Holdings' financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Yue Da International Holdings

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

Is There Enough Growth For Yue Da International Holdings?

There's an inherent assumption that a company should outperform the market for P/E ratios like Yue Da International Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 45% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Yue Da International Holdings is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Despite the recent share price weakness, Yue Da International Holdings' P/E remains higher than most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Yue Da International Holdings currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 4 warning signs we've spotted with Yue Da International Holdings (including 1 which is potentially serious).

You might be able to find a better investment than Yue Da International Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.