Yadong Group Holdings Limited (HKG:1795) shares have had a horrible month, losing 26% after a relatively good period beforehand. Still, a bad month hasn't completely ruined the past year with the stock gaining 45%, which is great even in a bull market.

In spite of the heavy fall in price, Yadong Group Holdings may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 12.7x, 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Yadong Group Holdings' financial performance has been poor lately as it's earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough 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.

Check out our latest analysis for Yadong Group Holdings

Is There Enough Growth For Yadong Group Holdings?

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

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 46% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 17% shows it's an unpleasant look.

With this information, we find it concerning that Yadong Group Holdings is trading at a P/E higher than the market. 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.

What We Can Learn From Yadong Group Holdings' P/E?

There's still some solid strength behind Yadong Group Holdings' P/E, if not its share price lately. 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 Yadong Group Holdings currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 5 warning signs for Yadong Group Holdings (2 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Yadong Group Holdings, 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.