Risks To Shareholder Returns Are Elevated At These Prices For China Resources Beverage (Holdings) Company Limited (HKG:2460)

With a price-to-earnings (or "P/E") ratio of 16.5x China Resources Beverage (Holdings) Company Limited (HKG:2460) may be sending bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 11x and even P/E's lower than 6x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for China Resources Beverage (Holdings) as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for China Resources Beverage (Holdings)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on China Resources Beverage (Holdings).

Does Growth Match The High P/E?

In order to justify its P/E ratio, China Resources Beverage (Holdings) would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Pleasingly, EPS has also lifted 59% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 12% each year during the coming three years according to the analysts following the company. With the market predicted to deliver 14% growth per year, the company is positioned for a weaker earnings result.

In light of this, it's alarming that China Resources Beverage (Holdings)'s P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Bottom Line On China Resources Beverage (Holdings)'s P/E

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 Resources Beverage (Holdings)'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. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for China Resources Beverage (Holdings) that you need to take into consideration.

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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.