Risks Still Elevated At These Prices As Yik Wo International Holdings Limited (HKG:8659) Shares Dive 28%

Yik Wo International Holdings Limited (HKG:8659) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 38% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Yik Wo International Holdings' price-to-earnings (or "P/E") ratio of 8.4x is worth a mention when the median P/E in Hong Kong is similar at about 10x. 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.

The earnings growth achieved at Yik Wo International Holdings over the last year would be more than acceptable for most companies. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Yik Wo International Holdings

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Yik Wo International Holdings' is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. EPS has also lifted 6.5% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 23% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Yik Wo International Holdings' P/E sits in line with the majority of other companies. 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 Key Takeaway

Yik Wo International Holdings' plummeting stock price has brought its P/E right back to the rest of the market. 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 Yik Wo International Holdings 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.

Having said that, be aware Yik Wo International Holdings is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Yik Wo International 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.