More Unpleasant Surprises Could Be In Store For Infinity Logistics and Transport Ventures Limited's (HKG:1442) Shares After Tumbling 26%

Infinity Logistics and Transport Ventures Limited (HKG:1442) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 79% share price decline.

Even after such a large drop in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider Infinity Logistics and Transport Ventures as a stock to potentially avoid with its 12.7x 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.

As an illustration, earnings have deteriorated at Infinity Logistics and Transport Ventures 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 Infinity Logistics and Transport Ventures

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Infinity Logistics and Transport Ventures will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Infinity Logistics and Transport Ventures would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 32% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Infinity Logistics and Transport Ventures' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Infinity Logistics and Transport Ventures' P/E?

Despite the recent share price weakness, Infinity Logistics and Transport Ventures' P/E remains higher than most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Infinity Logistics and Transport Ventures 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Infinity Logistics and Transport Ventures that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.