Zhong An Intelligent Living Service Limited's (HKG:2271) 28% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

To the annoyance of some shareholders, Zhong An Intelligent Living Service Limited (HKG:2271) shares are down a considerable 28% in the last month, which continues a horrid run for the company. Looking at the bigger picture, even after this poor month the stock is up 64% in the last year.

Even after such a large drop in price, Zhong An Intelligent Living Service may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.4x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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For example, consider that Zhong An Intelligent Living Service'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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Zhong An Intelligent Living Service

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 Zhong An Intelligent Living Service's earnings, revenue and cash flow.

Is There Enough Growth For Zhong An Intelligent Living Service?

Zhong An Intelligent Living Service'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 38% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 19% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 20% 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 Zhong An Intelligent Living Service'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. 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.

What We Can Learn From Zhong An Intelligent Living Service's P/E?

A significant share price dive has done very little to deflate Zhong An Intelligent Living Service's very lofty P/E. 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 Zhong An Intelligent Living Service 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Zhong An Intelligent Living Service (3 are significant!) that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.