Zhongtai Futures Company Limited (HKG:1461) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.3% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Zhongtai Futures' P/E ratio of 8.3x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 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.

As an illustration, earnings have deteriorated at Zhongtai Futures over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Zhongtai Futures

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 Zhongtai Futures' earnings, revenue and cash flow.

How Is Zhongtai Futures' Growth Trending?

In order to justify its P/E ratio, Zhongtai Futures would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 54% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 27% overall. 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 22% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Zhongtai Futures' P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Zhongtai Futures' stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Zhongtai Futures revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Zhongtai Futures that you should be aware of.

If these risks are making you reconsider your opinion on Zhongtai Futures, explore our interactive list of high quality stocks to get an idea of what else is out there.

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