There's Reason For Concern Over Tong Ren Tang Technologies Co. Ltd.'s (HKG:1666) Massive 34% Price Jump

The Tong Ren Tang Technologies Co. Ltd. (HKG:1666) share price has done very well over the last month, posting an excellent gain of 34%. Unfortunately, despite the strong performance over the last month, the full year gain of 7.1% isn't as attractive.

Although its price has surged higher, there still wouldn't be many who think Tong Ren Tang Technologies' price-to-earnings (or "P/E") ratio of 11.7x is worth a mention when the median P/E in Hong Kong is similar at about 11x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Tong Ren Tang Technologies as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Tong Ren Tang Technologies

Keen to find out how analysts think Tong Ren Tang Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/E ratio, Tong Ren Tang Technologies would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 2.9% gain to the company's bottom line. The latest three year period has also seen a 27% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 0.1% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 12% each year, which is noticeably more attractive.

In light of this, it's curious that Tong Ren Tang Technologies' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Tong Ren Tang Technologies' P/E

Its shares have lifted substantially and now Tong Ren Tang Technologies' P/E is also back up to the market median. 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 Tong Ren Tang Technologies currently trades on a 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 moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 2 warning signs for Tong Ren Tang Technologies (1 is concerning!) that we have uncovered.

You might be able to find a better investment than Tong Ren Tang Technologies. 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.