To the annoyance of some shareholders, King Of Catering (Global) Holdings Ltd. (HKG:8619) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 16% share price drop.

Although its price has dipped substantially, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may still consider King Of Catering (Global) Holdings as a stock to avoid entirely with its 24.9x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, King Of Catering (Global) Holdings has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for King Of Catering (Global) Holdings

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on King Of Catering (Global) Holdings will help you shine a light on its historical performance.

Is There Enough Growth For King Of Catering (Global) Holdings?

There's an inherent assumption that a company should far outperform the market for P/E ratios like King Of Catering (Global) Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 96% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 59% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 22% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that King Of Catering (Global) Holdings' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

What We Can Learn From King Of Catering (Global) Holdings' P/E?

A significant share price dive has done very little to deflate King Of Catering (Global) Holdings' very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that King Of Catering (Global) Holdings 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for King Of Catering (Global) Holdings (2 are concerning) you should be aware of.

If you're unsure about the strength of King Of Catering (Global) Holdings' 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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