Despite an already strong run, Zhaojin Mining Industry Company Limited (HKG:1818) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.
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 Zhaojin Mining Industry as a stock to avoid entirely with its 44.6x 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.
We've discovered 1 warning sign about Zhaojin Mining Industry. View them for free.Recent times have been advantageous for Zhaojin Mining Industry as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
Check out our latest analysis for Zhaojin Mining Industry
Does Growth Match The High P/E?
In order to justify its P/E ratio, Zhaojin Mining Industry would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 106%. Pleasingly, EPS has also lifted 3,875% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the eleven analysts covering the company suggest earnings should grow by 39% per year over the next three years. With the market only predicted to deliver 14% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Zhaojin Mining Industry'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
The strong share price surge has got Zhaojin Mining Industry's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Zhaojin Mining Industry maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You always need to take note of risks, for example - Zhaojin Mining Industry has 1 warning sign we think you should be aware of.
You might be able to find a better investment than Zhaojin Mining Industry. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.