Tingyi (Cayman Islands) Holding Corp. (HKG:322) Investors Are Less Pessimistic Than Expected

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Tingyi (Cayman Islands) Holding Corp. (HKG:322) as a stock to avoid entirely with its 16x 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.

Recent times have been advantageous for Tingyi (Cayman Islands) Holding as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Tingyi (Cayman Islands) Holding

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Tingyi (Cayman Islands) Holding's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 23% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 10% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 16% per annum, which is noticeably more attractive.

With this information, we find it concerning that Tingyi (Cayman Islands) Holding is trading at a P/E higher than the market. 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. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Tingyi (Cayman Islands) Holding's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Tingyi (Cayman Islands) Holding currently trades on a much 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 high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Tingyi (Cayman Islands) Holding has 1 warning sign we think you should be aware of.

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.