Wanguo Gold Group Limited (HKG:3939) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 243% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Wanguo Gold Group as a stock to avoid entirely with its 27.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Wanguo Gold Group as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Wanguo Gold Group
How Is Wanguo Gold Group's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Wanguo Gold Group's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 90% last year. The latest three year period has also seen an excellent 94% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised earnings results.
In light of this, it's curious that Wanguo Gold Group's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Final Word
Wanguo Gold Group's P/E is flying high just like its stock has during the last month. 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.
We've established that Wanguo Gold Group currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You should always think about risks. Case in point, we've spotted 1 warning sign for Wanguo Gold Group you should be aware of.
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.