China Daye Non-Ferrous Metals Mining Limited (HKG:661) shareholders would be excited to see that the share price has had a great month, posting a 51% gain and recovering from prior weakness.    Unfortunately, despite the strong performance over the last month, the full year gain of 5.7% isn't as attractive.  

Following the firm bounce in price, China Daye Non-Ferrous Metals Mining may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 15.7x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 5x are not unusual.  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 Daye Non-Ferrous Metals Mining 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.    

SEHK:661 Price to Earnings Ratio vs Industry March 19th 2024

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Daye Non-Ferrous Metals Mining will help you shine a light on its historical performance.  

How Is China Daye Non-Ferrous Metals Mining's Growth Trending?  

In order to justify its P/E ratio, China Daye Non-Ferrous Metals Mining would need to produce outstanding growth well in excess of the market.  

Retrospectively, the last year delivered a frustrating 63% decrease to the company's bottom line.   As a result, earnings from three years ago have also fallen 41% overall.  So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.  

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 Daye Non-Ferrous Metals Mining 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

The strong share price surge has got China Daye Non-Ferrous Metals Mining's P/E rushing to great heights as well.      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 China Daye Non-Ferrous Metals Mining revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow.  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.  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.    

We don't want to rain on the parade too much, but we did also find 3 warning signs for China Daye Non-Ferrous Metals Mining (2 shouldn't be ignored!) that you need to be mindful of.  

If you're unsure about the strength of China Daye Non-Ferrous Metals Mining'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.