Cinda Securities Co., Ltd.'s (SHSE:601059) 25% Share Price Surge Not Quite Adding Up

Simply Wall St · 09/27 22:25

Cinda Securities Co., Ltd. (SHSE:601059) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.8% over the last year.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Cinda Securities as a stock to potentially avoid with its 37.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at Cinda Securities 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Cinda Securities

pe-multiple-vs-industry
SHSE:601059 Price to Earnings Ratio vs Industry September 27th 2024
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cinda Securities will help you shine a light on its historical performance.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Cinda Securities would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 39% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Cinda Securities 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Cinda Securities' P/E

Cinda Securities' P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Cinda Securities revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Cinda Securities with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.