CK Life Sciences Int'l., (Holdings) Inc. (HKG:775) shareholders have had their patience rewarded with a 35% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.4% in the last twelve months.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider CK Life Sciences Int'l. (Holdings) as a stock to avoid entirely with its 49.6x 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.

The earnings growth achieved at CK Life Sciences Int'l. (Holdings) over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough 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.

See our latest analysis for CK Life Sciences Int'l. (Holdings)

Is There Enough Growth For CK Life Sciences Int'l. (Holdings)?

There's an inherent assumption that a company should far outperform the market for P/E ratios like CK Life Sciences Int'l. (Holdings)'s to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 30%. Still, incredibly EPS has fallen 38% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 16% shows it's an unpleasant look.

With this information, we find it concerning that CK Life Sciences Int'l. (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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On CK Life Sciences Int'l. (Holdings)'s P/E

Shares in CK Life Sciences Int'l. (Holdings) have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that CK Life Sciences Int'l. (Holdings) currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for CK Life Sciences Int'l. (Holdings) (2 are a bit unpleasant) you should be aware of.

If you're unsure about the strength of CK Life Sciences Int'l. (Holdings)'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.