BOC International (China) CO., LTD.'s (SHSE:601696) Shares Climb 33% But Its Business Is Yet to Catch Up

BOC International (China) CO., LTD. (SHSE:601696) shares have had a really impressive month, gaining 33% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, BOC International (China) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 46.8x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. 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.

BOC International (China) has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for BOC International (China)

Keen to find out how analysts think BOC International (China)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is BOC International (China)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as BOC International (China)'s is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 27% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 26% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 21% during the coming year according to the one analyst following the company. Meanwhile, the rest of the market is forecast to expand by 36%, which is noticeably more attractive.

With this information, we find it concerning that BOC International (China) is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From BOC International (China)'s P/E?

BOC International (China)'s P/E is flying high just like its stock has during the last month. 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.

Our examination of BOC International (China)'s analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for BOC International (China) that you should be aware of.

If you're unsure about the strength of BOC International (China)'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.