The Meitu, Inc. (HKG:1357) share price has done very well over the last month, posting an excellent gain of 120%. The last month tops off a massive increase of 162% in the last year.
Following the firm bounce in price, Meitu's price-to-earnings (or "P/E") ratio of 60.5x 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 10x and even P/E's below 6x 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.
While the market has experienced earnings growth lately, Meitu's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Meitu
Is There Enough Growth For Meitu?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Meitu's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 33% per annum as estimated by the seven analysts watching the company. With the market only predicted to deliver 13% per annum, the company is positioned for a stronger earnings result.
With this information, we can see why Meitu 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.
What We Can Learn From Meitu's P/E?
The strong share price surge has got Meitu'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.
We've established that Meitu 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. It's hard to see the share price falling strongly in the near future under these circumstances.
You always need to take note of risks, for example - Meitu has 2 warning signs we think you should be aware of.
Of course, you might also be able to find a better stock than Meitu. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.