A Piece Of The Puzzle Missing From YuanShengTai Dairy Farm Limited's (HKG:1431) 29% Share Price Climb
YuanShengTai Dairy Farm Limited (HKG:1431) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 99% in the last year.
Although its price has surged higher, YuanShengTai Dairy Farm may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 4.4x, since almost half of all companies in Hong Kong have P/E ratios greater than 13x and even P/E's higher than 25x are not unusual. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for YuanShengTai Dairy Farm as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Check out our latest analysis for YuanShengTai Dairy Farm
Does Growth Match The Low P/E?
YuanShengTai Dairy Farm's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.
Retrospectively, the last year delivered an exceptional 437% gain to the company's bottom line. The latest three year period has also seen an excellent 157% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 20% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that YuanShengTai Dairy Farm's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.
What We Can Learn From YuanShengTai Dairy Farm's P/E?
YuanShengTai Dairy Farm's recent share price jump still sees its P/E sitting firmly flat on the ground. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of YuanShengTai Dairy Farm revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with YuanShengTai Dairy Farm (at least 1 which is significant), and understanding these should be part of your investment process.
If you're unsure about the strength of YuanShengTai Dairy Farm's 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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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.