With A 25% Price Drop For Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) You'll Still Get What You Pay For

The Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) share price has softened a substantial 25% over the previous 30 days, handing back much of the gains the stock has made lately. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 331%.

In spite of the heavy fall in price, Yangtze Optical Fibre And Cable Limited may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 47.5x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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Yangtze Optical Fibre And Cable Limited could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for Yangtze Optical Fibre And Cable Limited

Does Growth Match The High P/E?

In order to justify its P/E ratio, Yangtze Optical Fibre And Cable Limited would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 42%. As a result, earnings from three years ago have also fallen 22% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 36% each year during the coming three years according to the five analysts following the company. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Yangtze Optical Fibre And Cable Limited is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Yangtze Optical Fibre And Cable Limited's P/E

Yangtze Optical Fibre And Cable Limited's shares may have retreated, but its P/E is still flying high. 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 Yangtze Optical Fibre And Cable Limited'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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Yangtze Optical Fibre And Cable Limited (at least 1 which doesn't sit too well with us), and understanding these should be part of your investment process.

If you're unsure about the strength of Yangtze Optical Fibre And Cable Limited'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.