There's Reason For Concern Over Xiamen Yan Palace Bird's Nest Industry Co., Ltd.'s (HKG:1497) Massive 63% 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 63%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Xiamen Yan Palace Bird's Nest Industry as a stock to avoid entirely with its 30x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Xiamen Yan Palace Bird's Nest Industry's earnings growth of late has been pretty similar to most other companies. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

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Does Growth Match The High P/E?

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 growth, the company posted a worthy increase of 4.5%. Pleasingly, EPS has also lifted 45% in aggregate from three years ago, partly thanks to the last 12 months of growth. 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% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the market is forecast to expand by 15% per annum, which is not materially different.

With this information, we find it interesting that Xiamen Yan Palace Bird's Nest Industry is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Xiamen Yan Palace Bird's Nest Industry's P/E?

The strong share price surge has got Xiamen Yan Palace Bird's Nest Industry's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Xiamen Yan Palace Bird's Nest Industry, and understanding should be part of your investment process.

You might be able to find a better investment than Xiamen Yan Palace Bird's Nest Industry. 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.

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