Jiumaojiu International Holdings Limited's (HKG:9922) price-to-earnings (or "P/E") ratio of 14.2x might make it look like a 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Jiumaojiu International Holdings has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Jiumaojiu International Holdings
Is There Enough Growth For Jiumaojiu International Holdings?
In order to justify its P/E ratio, Jiumaojiu International Holdings would need to produce impressive growth in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 43%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 21% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 28% per year during the coming three years according to the analysts following the company. With the market only predicted to deliver 13% per year, the company is positioned for a stronger earnings result.
With this information, we can see why Jiumaojiu International Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Jiumaojiu International Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
Before you settle on your opinion, we've discovered 2 warning signs for Jiumaojiu International Holdings that you should be aware of.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.