The Hang Tai Yue Group Holdings Limited (HKG:8081) share price has fared very poorly over the last month, falling by a substantial 29%. For any long-term shareholders, the last month ends a year to forget by locking in a 63% share price decline.

Even after such a large drop in price, Hang Tai Yue Group Holdings may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 15.9x, 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.

The earnings growth achieved at Hang Tai Yue Group Holdings over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Hang Tai Yue Group Holdings' to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 14%. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 18% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Hang Tai Yue Group Holdings 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

Hang Tai Yue Group Holdings' shares may have retreated, but its P/E is still flying high. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hang Tai Yue Group Holdings currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

Plus, you should also learn about these 3 warning signs we've spotted with Hang Tai Yue Group Holdings (including 1 which is a bit unpleasant).

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.

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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.