Those who hold Sanai Health Industry Group Company Limited (HKG:1889) Stocks would be relieved that the stock price rebounded 35% in the last thirty days, but it must continue to repair the recent damage it has caused to investors’ portfolios. The bad news is that even after the stock rally over the past 30 days, shareholders are still underwater by around 5.6% over the past year.

Given that its price has surged, given that nearly half of Hong Kong companies have price-to-earnings (or “P/E”) ratios below 8x, you can think of Sanai Health Industry Group as a stock to avoid entirely with its 25 x P/E ratio. Still, we would need to dig a little deeper to determine if there is a rational basis for the very high P/E.

Sanai Health Industry Group has certainly been doing a great job lately as its profits have been growing at a very rapid rate. It appears many expect the strong earnings performance to outperform most other companies in the period ahead, which has increased investors’ willingness to pay for the stock. You really hope so, otherwise you pay a pretty high price for no particular reason.

See our latest analysis for Sanai Health Industry Group

Want a complete picture of the company’s profits, revenue, and cash flow? Then our free report on Sanai Health Industry Group will help you shed light on its historical performance.

What do the growth indicators tell us about the high P/E?

Sanai Health Industry Group’s P/E ratio would be typical of a company that is expected to show very strong growth and, more importantly, much better than the market.

Looking back first, we see that the company increased its earnings per share by 41% last year. However, its longer-term performance has not been as strong, with three-year EPS growth being relatively non-existent overall. It therefore seems to us that the company has had a mixed result in terms of earnings growth during this period.

Comparing that to the market, which is expected to grow 17% over the next 12 months, the company’s momentum is weaker based on recent mid-term annualized results.

In light of this, it is alarming that Sanai Health Industry Group’s P/E sits above the majority of other companies. It seems that most investors are ignoring the relatively subdued recent growth rates and hoping for a turnaround in the company’s business prospects. Chances are existing shareholders are bracing for future disappointment if the P/E falls to levels more in line with recent growth rates.

The last word

Sanai Health Industry Group’s P/E is booming, as is its stock over the past month. We would argue that the power of the P/E ratio is not primarily a valuation tool, but rather to gauge current investor sentiment and future expectations.

We have established that Sanai Health Industry Group is currently trading at a much higher P/E than expected since its recent three-year growth is below broader market expectations. When we see weak earnings with slower growth than the market, we suspect the stock price may decline, driving down the high P/E. Unless recent medium-term conditions improve significantly, it is very difficult to accept these prices as reasonable.

That said, know Sanai Health Industry Group Shows 2 Warning Signs in our investment analysis, you should know.

If you are interested in P/E ratiosyou might want to see this free collection of other companies that have increased earnings sharply and are trading at P/Es below 20x.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.