There's Reason For Concern Over Xiamen Yan Palace Bird's Nest Industry Co., Ltd.'s (HKG:1497) Massive 26% Price Jump

The Xiamen Yan Palace Bird's Nest Industry Co., Ltd. (HKG:1497) share price has done very well over the last month, posting an excellent gain of 26%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 44% in the last twelve months.

Following the firm bounce in price, Xiamen Yan Palace Bird's Nest Industry's price-to-earnings (or "P/E") ratio of 21.7x 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 11x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, Xiamen Yan Palace Bird's Nest Industry's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Xiamen Yan Palace Bird's Nest Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xiamen Yan Palace Bird's Nest Industry.

Is There Enough Growth For Xiamen Yan Palace Bird's Nest Industry?

In order to justify its P/E ratio, Xiamen Yan Palace Bird's Nest Industry would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 27%. As a result, earnings from three years ago have also fallen 14% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 9.1% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 19% growth forecast for the broader market.

With this information, we find it concerning that Xiamen Yan Palace Bird's Nest Industry is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shares in Xiamen Yan Palace Bird's Nest Industry have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Xiamen Yan Palace Bird's Nest Industry's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Xiamen Yan Palace Bird's Nest Industry with six simple checks will allow you to discover any risks that could be an issue.

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.