Tian Yuan Group Holdings Limited's (HKG:6119) 32% Price Boost Is Out Of Tune With Earnings

Tian Yuan Group Holdings Limited (HKG:6119) shareholders have had their patience rewarded with a 32% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 6.4% isn't as impressive.

Since its price has surged higher, Tian Yuan Group Holdings' price-to-earnings (or "P/E") ratio of 12.1x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Tian Yuan Group Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Tian Yuan Group 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 Tian Yuan Group Holdings' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as high as Tian Yuan Group Holdings' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.3%. However, this wasn't enough as the latest three year period has seen an unpleasant 8.2% overall drop in EPS. 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 20% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Tian Yuan Group Holdings' P/E sits above the majority of other companies. 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. 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.

The Final Word

Tian Yuan Group Holdings shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Tian Yuan Group Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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 is also worth noting that we have found 1 warning sign for Tian Yuan Group Holdings that you need to take into consideration.

You might be able to find a better investment than Tian Yuan Group Holdings. 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.