Risks To Shareholder Returns Are Elevated At These Prices For China New Town Development Company Limited (HKG:1278)

China New Town Development Company Limited's (HKG:1278) price-to-earnings (or "P/E") ratio of 17.5x might make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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For instance, China New Town Development's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for China New Town Development

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on China New Town Development's earnings, revenue and cash flow.

How Is China New Town Development's Growth Trending?

In order to justify its P/E ratio, China New Town Development would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's an unpleasant look.

With this information, we find it concerning that China New Town Development is trading at a P/E higher than the market. 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

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 China New Town Development 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's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with China New Town Development (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

If you're unsure about the strength of China New Town Development'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.