Pine Care Group Limited (HKG:1989) Shares May Have Slumped 28% But Getting In Cheap Is Still Unlikely

The Pine Care Group Limited (HKG:1989) share price has fared very poorly over the last month, falling by a substantial 28%. Still, a bad month hasn't completely ruined the past year with the stock gaining 40%, which is great even in a bull market.

Even after such a large drop in price, Pine Care Group may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.3x, since 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 quite high for a reason and it requires further investigation to determine if it's justified.

Earnings have risen firmly for Pine Care Group recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Pine Care Group

Although there are no analyst estimates available for Pine Care Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Pine Care Group?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Pine Care Group's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. The latest three year period has also seen an excellent 69% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Pine Care Group's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Pine Care Group's P/E

Pine Care Group's shares may have retreated, but its P/E is still flying high. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Pine Care Group currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Pine Care Group (2 are potentially serious!) that you need to be mindful of.

If you're unsure about the strength of Pine Care Group'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. 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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