Why Investors Shouldn't Be Surprised By Chow Tai Fook Jewellery Group Limited's (HKG:1929) 29% Share Price Surge

Chow Tai Fook Jewellery Group Limited (HKG:1929) shares have continued their recent momentum with a 29% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

After such a large jump in price, Chow Tai Fook Jewellery Group's price-to-earnings (or "P/E") ratio of 21.9x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 11x and even P/E's below 6x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Chow Tai Fook Jewellery Group hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, 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.

View our latest analysis for Chow Tai Fook Jewellery Group

Does Growth Match The High P/E?

Chow Tai Fook Jewellery Group's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

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 32%. As a result, earnings from three years ago have also fallen 39% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 19% per year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

With this information, we can see why Chow Tai Fook Jewellery Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Chow Tai Fook Jewellery Group's P/E?

Shares in Chow Tai Fook Jewellery Group have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Chow Tai Fook Jewellery Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Chow Tai Fook Jewellery Group you should know about.

You might be able to find a better investment than Chow Tai Fook Jewellery Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.