Tian Ruixiang Holdings Ltd's (NASDAQ:TIRX) 46% Share Price Plunge Could Signal Some Risk

To the annoyance of some shareholders, Tian Ruixiang Holdings Ltd (NASDAQ:TIRX) shares are down a considerable 46% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, Tian Ruixiang Holdings' price-to-earnings (or "P/E") ratio of 77.7x might still make it look like a strong sell right now compared to the market in the United States, where around half of the companies have P/E ratios below 19x and even P/E's below 11x are quite common. 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.

With earnings growth that's exceedingly strong of late, Tian Ruixiang Holdings has been doing very well. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Tian Ruixiang Holdings

Although there are no analyst estimates available for Tian Ruixiang Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 266% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 34% drop in EPS in aggregate. 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 17% 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 Tian Ruixiang 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. 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 Bottom Line On Tian Ruixiang Holdings' P/E

Even after such a strong price drop, Tian Ruixiang Holdings' P/E still exceeds the rest of the market significantly. 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.

Our examination of Tian Ruixiang Holdings revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Tian Ruixiang Holdings (1 is concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Tian Ruixiang Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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This article by Simply Wall St is general in nature. 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.
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