Investors Appear Satisfied With Sichuan Baicha Baidao Industrial Co., Ltd.'s (HKG:2555) Prospects

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 12x, you may consider Sichuan Baicha Baidao Industrial Co., Ltd. (HKG:2555) as a stock to avoid entirely with its 25.4x 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.

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Sichuan Baicha Baidao Industrial hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Sichuan Baicha Baidao Industrial

Keen to find out how analysts think Sichuan Baicha Baidao Industrial's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Sichuan Baicha Baidao Industrial would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 66%. This means it has also seen a slide in earnings over the longer-term as EPS is down 58% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 26% per annum over the next three years. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Sichuan Baicha Baidao Industrial'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 Bottom Line On Sichuan Baicha Baidao Industrial'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 Sichuan Baicha Baidao Industrial'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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Sichuan Baicha Baidao Industrial that you need to be mindful of.

Of course, you might also be able to find a better stock than Sichuan Baicha Baidao Industrial. 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.