BYD Company Limited's (HKG:1211) Popularity With Investors Is Clear

With a price-to-earnings (or "P/E") ratio of 19.4x BYD Company Limited (HKG:1211) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

BYD 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for BYD

If you'd like to see what analysts are forecasting going forward, you should check out our free report on BYD.

Is There Enough Growth For BYD?

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

Retrospectively, the last year delivered an exceptional 81% gain to the company's bottom line. The latest three year period has also seen an excellent 603% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 20% per annum during the coming three years according to the analysts following the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that BYD'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.

The Final Word

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for BYD with six simple checks.

Of course, you might also be able to find a better stock than BYD. 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.