Market Participants Recognise Shoucheng Holdings Limited's (HKG:697) Earnings Pushing Shares 26% Higher

Shoucheng Holdings Limited (HKG:697) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 19% over that time.

Since its price has surged higher, Shoucheng Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 24.8x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 5x 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.

Shoucheng Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Shoucheng Holdings

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

How Is Shoucheng Holdings' Growth Trending?

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

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 42%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 26% per annum during the coming three years according to the two analysts following the company. With the market only predicted to deliver 12% per annum, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shoucheng Holdings' P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shoucheng Holdings' P/E

Shoucheng Holdings' P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shoucheng Holdings' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Shoucheng Holdings (including 1 which is a bit unpleasant).

If you're unsure about the strength of Shoucheng Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.