Despite an already strong run, West China Cement Limited (HKG:2233) shares have been powering on, with a gain of 33% in the last thirty days. The last month tops off a massive increase of 108% in the last year.
After such a large jump in price, West China Cement's price-to-earnings (or "P/E") ratio of 27.6x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. 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.
West China Cement could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Check out our latest analysis for West China Cement
How Is West China Cement's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as West China Cement's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered a frustrating 75% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 85% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 103% each year as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.
In light of this, it's understandable that West China Cement's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From West China Cement's P/E?
The strong share price surge has got West China Cement's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that West China Cement maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you settle on your opinion, we've discovered 3 warning signs for West China Cement that you should be aware of.
You might be able to find a better investment than West China Cement. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.