Everbright Grand China Assets Limited's (HKG:3699) 55% Price Boost Is Out Of Tune With Earnings

Everbright Grand China Assets Limited (HKG:3699) shares have had a really impressive month, gaining 55% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Following the firm bounce in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Everbright Grand China Assets as a stock to potentially avoid with its 12.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, Everbright Grand China Assets' receding earnings in recent times would have to be some food for thought. 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. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Everbright Grand China Assets

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How Is Everbright Grand China Assets' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Everbright Grand China Assets' is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 25%. As a result, earnings from three years ago have also fallen 53% 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.

With this information, we find it concerning that Everbright Grand China Assets is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Everbright Grand China Assets' P/E?

The large bounce in Everbright Grand China Assets' shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Everbright Grand China Assets 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Everbright Grand China Assets (at least 2 which don't sit too well with us), and understanding them should be part of your investment process.

Of course, you might also be able to find a better stock than Everbright Grand China Assets. 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.