There's Reason For Concern Over China Golden Classic Group Limited's (HKG:8281) Massive 50% Price Jump

The China Golden Classic Group Limited (HKG:8281) share price has done very well over the last month, posting an excellent gain of 50%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Since its price has surged higher, China Golden Classic Group's price-to-earnings (or "P/E") ratio of 27.7x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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As an illustration, earnings have deteriorated at China Golden Classic Group over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for China Golden Classic Group

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

Does Growth Match The High P/E?

China Golden Classic Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 58% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 77% 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.

In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that China Golden Classic Group is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has got China Golden Classic Group's P/E rushing to great heights as well. 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.

Our examination of China Golden Classic Group revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

Having said that, be aware China Golden Classic Group is showing 5 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

Of course, you might also be able to find a better stock than China Golden Classic Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.