China Resources Beer (Holdings) Company Limited (HKG:291) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.
Since its price has surged higher, China Resources Beer (Holdings) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 17.4x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
China Resources Beer (Holdings)'s earnings growth of late has been pretty similar to most other companies. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for China Resources Beer (Holdings)
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like China Resources Beer (Holdings)'s to be considered reasonable.
Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Still, the latest three year period was better as it's delivered a decent 21% overall rise in EPS. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the analysts watching the company. That's shaping up to be similar to the 12% per annum growth forecast for the broader market.
With this information, we find it interesting that China Resources Beer (Holdings) is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Final Word
The strong share price surge has got China Resources Beer (Holdings)'s P/E rushing to great heights as well. 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.
Our examination of China Resources Beer (Holdings)'s analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for China Resources Beer (Holdings) with six simple checks on some of these key factors.
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.