Subdued Growth No Barrier To China Feihe Limited (HKG:6186) With Shares Advancing 40%

Despite an already strong run, China Feihe Limited (HKG:6186) shares have been powering on, with a gain of 40% in the last thirty days. The last 30 days bring the annual gain to a very sharp 29%.

Since its price has surged higher, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider China Feihe as a stock to potentially avoid with its 13.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

China Feihe hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for China Feihe

Want the full picture on analyst estimates for the company? Then our free report on China Feihe will help you uncover what's on the horizon.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, China Feihe would need to produce impressive growth in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 19%. This means it has also seen a slide in earnings over the longer-term as EPS is down 58% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 9.5% each year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 12% per annum, which is noticeably more attractive.

In light of this, it's alarming that China Feihe'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. 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 China Feihe's P/E

The large bounce in China Feihe's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of China Feihe'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.

You always need to take note of risks, for example - China Feihe has 1 warning sign we think you should be aware of.

You might be able to find a better investment than China Feihe. 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.