Greentown Service Group Co. Ltd.'s (HKG:2869) 53% Jump Shows Its Popularity With Investors

Greentown Service Group Co. Ltd. (HKG:2869) shares have continued their recent momentum with a 53% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 5.9% isn't as attractive.

Following the firm bounce in price, Greentown Service Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 22.8x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x 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.

With earnings growth that's superior to most other companies of late, Greentown Service Group has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 18% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 19% per annum over the next three years. With the market only predicted to deliver 16% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Greentown Service Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Greentown Service Group's P/E rushing to great heights as well. 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 Greentown Service Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Greentown Service Group that you need to take into consideration.

If these risks are making you reconsider your opinion on Greentown Service Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.