East Group Co.,Ltd (SZSE:300376) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about East GroupLtd's P/E ratio of 30.5x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
As an illustration, earnings have deteriorated at East GroupLtd over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
What Are Growth Metrics Telling Us About The P/E?
The only time you'd be comfortable seeing a P/E like East GroupLtd's is when the company's growth is tracking the market closely.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.8%. Even so, admirably EPS has lifted 41% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 42% shows it's noticeably less attractive on an annualised basis.
With this information, we find it interesting that East GroupLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Bottom Line On East GroupLtd's P/E
Its shares have lifted substantially and now East GroupLtd's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that East GroupLtd currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about this 1 warning sign we've spotted with East GroupLtd.
If you're unsure about the strength of East GroupLtd'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.