WuXi XDC Cayman Inc. (HKG:2268) shares have continued their recent momentum with a 31% gain in the last month alone. The annual gain comes to 143% following the latest surge, making investors sit up and take notice.
After such a large jump in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may consider WuXi XDC Cayman as a stock to avoid entirely with its 46.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
WuXi XDC Cayman certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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 WuXi XDC Cayman
Is There Enough Growth For WuXi XDC Cayman?
There's an inherent assumption that a company should far outperform the market for P/E ratios like WuXi XDC Cayman's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 222%. The latest three year period has also seen an excellent 874% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 32% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 13% per year, which is noticeably less attractive.
In light of this, it's understandable that WuXi XDC Cayman'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 Bottom Line On WuXi XDC Cayman's P/E
The strong share price surge has got WuXi XDC Cayman'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.
As we suspected, our examination of WuXi XDC Cayman's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for WuXi XDC Cayman with six simple checks on some of these key factors.
If you're unsure about the strength of WuXi XDC Cayman's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.