Some Confidence Is Lacking In China Modern Dairy Holdings Ltd. (HKG:1117) As Shares Slide 32%

The China Modern Dairy Holdings Ltd. (HKG:1117) share price has softened a substantial 32% over the previous 30 days, handing back much of the gains the stock has made lately. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 144% in the last twelve months.

Although its price has dipped substantially, there still wouldn't be many who think China Modern Dairy Holdings' price-to-earnings (or "P/E") ratio of 13.1x is worth a mention when the median P/E in Hong Kong is similar at about 12x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With its earnings growth in positive territory compared to the declining earnings of most other companies, China Modern Dairy Holdings has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for China Modern Dairy Holdings

Keen to find out how analysts think China Modern Dairy Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like China Modern Dairy Holdings' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 118% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 18% per annum as estimated by the nine analysts watching the company. With the market predicted to deliver 22% growth each year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that China Modern Dairy Holdings is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

What We Can Learn From China Modern Dairy Holdings' P/E?

Following China Modern Dairy Holdings' share price tumble, its P/E is now hanging on to the median market P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that China Modern Dairy Holdings currently trades on a 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for China Modern Dairy Holdings (1 can't be ignored!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.

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This article by Simply Wall St is general in nature. 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.
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