Earnings Tell The Story For Baowu Magnesium Technology Co., Ltd. (SZSE:002182)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Baowu Magnesium Technology Co., Ltd. (SZSE:002182) as a stock to potentially avoid with its 31.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

While the market has experienced earnings growth lately, Baowu Magnesium Technology's earnings have gone into reverse gear, which is not great. 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 Baowu Magnesium Technology

Want the full picture on analyst estimates for the company? Then our free report on Baowu Magnesium Technology will help you uncover what's on the horizon.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Baowu Magnesium Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 50% each year during the coming three years according to the six analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 24% per annum, which is noticeably less attractive.

In light of this, it's understandable that Baowu Magnesium Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Baowu Magnesium Technology's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Baowu Magnesium Technology'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. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 4 warning signs for Baowu Magnesium Technology (2 are a bit concerning!) that we have uncovered.

You might be able to find a better investment than Baowu Magnesium Technology. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com