To the annoyance of some shareholders, Ziyuanyuan Holdings Group Limited (HKG:8223) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Longer-term shareholders would now have taken a real hit with the stock declining 7.1% in the last year.

Even after such a large drop in price, Ziyuanyuan Holdings Group may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 46.5x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Ziyuanyuan Holdings Group's financial performance has been pretty ordinary lately as earnings growth is non-existent. 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. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Growth For Ziyuanyuan Holdings Group?

In order to justify its P/E ratio, Ziyuanyuan Holdings Group would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 16% overall rise in EPS. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 23% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Ziyuanyuan Holdings Group's P/E sits above the majority of other companies. 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 Key Takeaway

Even after such a strong price drop, Ziyuanyuan Holdings Group's P/E still exceeds the rest of the market significantly. 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.

Our examination of Ziyuanyuan Holdings Group 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Ziyuanyuan Holdings Group is showing 5 warning signs in our investment analysis, and 1 of those is concerning.

Of course, you might also be able to find a better stock than Ziyuanyuan Holdings Group. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.