What DTXS Silk Road Investment Holdings Company Limited's (HKG:620) 89% Share Price Gain Is Not Telling You

DTXS Silk Road Investment Holdings Company Limited (HKG:620) shareholders are no doubt pleased to see that the share price has bounced 89% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 70% share price decline over the last year.

After such a large jump in price, DTXS Silk Road Investment Holdings may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 17.5x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 4x 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.

Recent times have been quite advantageous for DTXS Silk Road Investment Holdings as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for DTXS Silk Road Investment Holdings

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 DTXS Silk Road Investment Holdings' earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, DTXS Silk Road Investment Holdings would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 430% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that DTXS Silk Road Investment Holdings 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On DTXS Silk Road Investment Holdings' P/E

Shares in DTXS Silk Road Investment Holdings have built up some good momentum lately, which has really inflated its P/E. 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 DTXS Silk Road Investment Holdings currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for DTXS Silk Road Investment Holdings you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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.