When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) below 9x, you may consider China Art Financial Holdings Limited (HKG:1572) as a stock to avoid entirely with its 19x 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 China Art Financial Holdings 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. If not, then existing shareholders may be quite nervous about the viability of the share price.
See our latest analysis for China Art Financial Holdings
Although there are no analyst estimates available for China Art Financial 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?
The only time you’d be truly comfortable seeing a P/E as steep as China Art Financial Holdings’ is when the company’s growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 24% decrease to the company’s bottom line. As a result, earnings from three years ago have also fallen 75% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
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.
With this information, we find it concerning that China Art Financial 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 Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn’t sensible, however it can be a practical guide to the company’s future prospects.
We’ve established that China Art Financial Holdings 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.
Don’t forget that there may be other risks. For instance, we’ve identified 4 warning signs for China Art Financial Holdings (2 can’t be ignored) you should be aware of.
If you’re unsure about the strength of China Art Financial Holdings’ business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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Find out whether China Art Financial Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.