Despite an already strong run, Alibaba Pictures Group Limited (HKG:1060) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.
Since its price has surged higher, Alibaba Pictures Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.7x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 5x 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.
Alibaba Pictures Group could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.
Check out our latest analysis for Alibaba Pictures Group
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 Alibaba Pictures Group's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 8.2% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 1,465% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 74% each year during the coming three years according to the six analysts following the company. With the market only predicted to deliver 12% each year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Alibaba Pictures Group'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.
The Key Takeaway
Alibaba Pictures Group's P/E is flying high just like its stock has during the last month. 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.
As we suspected, our examination of Alibaba Pictures Group'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. It's hard to see the share price falling strongly in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with Alibaba Pictures Group.
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.