Yinsheng Digifavor Company Limited's (HKG:3773) Shares Climb 29% But Its Business Is Yet to Catch Up

Yinsheng Digifavor Company Limited (HKG:3773) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Yinsheng Digifavor as a stock to avoid entirely with its 67.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Yinsheng Digifavor over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Yinsheng Digifavor

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 Yinsheng Digifavor's earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Yinsheng Digifavor would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 46% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 18% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Yinsheng Digifavor 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.

The Final Word

Shares in Yinsheng Digifavor 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 Yinsheng Digifavor currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Yinsheng Digifavor that you should be aware of.

You might be able to find a better investment than Yinsheng Digifavor. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com