Some Shareholders Feeling Restless Over Zhongtai Futures Company Limited's (HKG:1461) P/E Ratio

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider Zhongtai Futures Company Limited (HKG:1461) as a stock to potentially avoid with its 17.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

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As an illustration, earnings have deteriorated at Zhongtai Futures 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 Zhongtai Futures

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhongtai Futures' earnings, revenue and cash flow.

How Is Zhongtai Futures' Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. As a result, earnings from three years ago have also fallen 82% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Zhongtai Futures' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

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.

We've established that Zhongtai Futures currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Zhongtai Futures (of which 2 shouldn't be ignored!) you should know about.

If these risks are making you reconsider your opinion on Zhongtai Futures, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.