Kaisa Capital Investment Holdings Limited (HKG:936) shares have retraced a considerable 38% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 28% in the last year.

Although its price has dipped substantially, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider Kaisa Capital Investment Holdings as a stock to avoid entirely with its 48.7x 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 so lofty.

It looks like earnings growth has deserted Kaisa Capital Investment Holdings recently, which is not something to boast about. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Kaisa Capital Investment Holdings?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Kaisa Capital Investment Holdings' to be considered reasonable.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Kaisa Capital Investment Holdings is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From Kaisa Capital Investment Holdings' P/E?

A significant share price dive has done very little to deflate Kaisa Capital Investment Holdings' very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Kaisa Capital Investment 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.

Before you take the next step, you should know about the 4 warning signs for Kaisa Capital Investment Holdings (2 make us uncomfortable!) that we have uncovered.

You might be able to find a better investment than Kaisa Capital Investment Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.