When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider WuXi XDC Cayman Inc. (HKG:2268) as a stock to avoid entirely with its 60.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
WuXi XDC Cayman certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for WuXi XDC Cayman
How Is WuXi XDC Cayman's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as WuXi XDC Cayman's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 57% gain to the company's bottom line. Pleasingly, EPS has also lifted 449% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 59% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 16% per year growth forecast for the broader market.
With this information, we can see why WuXi XDC Cayman 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.
The Bottom Line On WuXi XDC Cayman's 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 WuXi XDC Cayman'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. Unless these conditions change, they will continue to provide strong support to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with WuXi XDC Cayman, and understanding should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.