Why We’re Not Concerned About the Share Price of Shandong Fengxiang Co., Ltd (HKG:9977)

When nearly half of Hong Kong companies have price-to-earnings (or “P/E”) ratios below 9x, you might want to consider Shandong Fengxiang Co.,Ltd (HKG:9977) as a stock to avoid entirely with its P/E ratio of 33.3x. However, the P/E may be quite high for a reason and it requires further investigation to determine if it is warranted.

Shandong Fengxiang could do better as its earnings have recently slipped, while most other companies have seen positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You really hope so, otherwise you pay a pretty high price for no particular reason.

See our latest review for Shandong Fengxiang

SEHK: 9977 Price based on prior earnings as of April 8, 2022

Want to know how analysts think Shandong Fengxiang’s future compares to the industry? In this case our free report is an excellent starting point.

What do the growth indicators tell us about the high P/E?

There is an inherent assumption that a company would have to significantly outperform the market for P/E ratios like Shandong Fengxiang’s to be considered reasonable.

Looking back first, the company’s earnings per share growth last year wasn’t anything to get excited about, as it posted a disappointing 73% decline. As a result, revenues from three years ago also fell by 75% overall. As a result, shareholders would have been disappointed with medium-term earnings growth rates.

Looking ahead, estimates from the only analyst covering the company suggest earnings are set to rise 49% over the next year. Meanwhile, the rest of the market is only expected to grow by 18%, which is significantly less attractive.

With this information, we can understand why Shandong Fengxiang is trading at such a high P/E relative to the market. Apparently shareholders don’t want to offload something that potentially looks to a more prosperous future.

The Key Takeaway

We would argue that the power of the P/E ratio is not primarily a valuation tool, but rather to gauge current investor sentiment and future expectations.

As we suspected, our review of Shandong Fengxiang’s analyst forecasts revealed that its better earnings outlook is contributing to its elevated P/E. At this point, investors believe that the potential for earnings deterioration is not large enough to warrant a lower P/E ratio. It is difficult to see the share price falling sharply in the near future under these circumstances.

That said, know Shandong Fengxiang shows 2 warning signs in our investment analysis, you should know.

It’s important to be sure to research a great company, not just the first idea you come across. So take a look at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.