Shareholders Should Be Pleased With Shanghai Pioneer Holding Ltd's (HKG:1345) Price

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Shanghai Pioneer Holding Ltd (HKG:1345) as a stock to potentially avoid with its 13.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Shanghai Pioneer Holding's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Shanghai Pioneer Holding

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Pioneer Holding will help you shine a light on its historical performance.

How Is Shanghai Pioneer Holding's Growth Trending?

Shanghai Pioneer Holding's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 37%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 186% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Shanghai Pioneer Holding is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Key Takeaway

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.

We've established that Shanghai Pioneer Holding maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shanghai Pioneer Holding (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If you're unsure about the strength of Shanghai Pioneer Holding's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com