Dexin Services Group Limited (HKG:2215) Shares May Have Slumped 31% But Getting In Cheap Is Still Unlikely

To the annoyance of some shareholders, Dexin Services Group Limited (HKG:2215) shares are down a considerable 31% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

Although its price has dipped substantially, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may still consider Dexin Services Group as a stock to avoid entirely with its 18.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For instance, Dexin Services Group's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Dexin Services Group

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dexin Services Group's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Dexin Services Group would need to produce outstanding growth well 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 57%. As a result, earnings from three years ago have also fallen 73% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Dexin Services Group's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Dexin Services Group's P/E?

Dexin Services Group's shares may have retreated, but its P/E is still flying high. 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.

We've established that Dexin Services Group currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

Plus, you should also learn about these 3 warning signs we've spotted with Dexin Services Group (including 2 which can't be ignored).

Of course, you might also be able to find a better stock than Dexin Services 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.