China International Capital Corporation Limited's (HKG:3908) 66% Jump Shows Its Popularity With Investors

The China International Capital Corporation Limited (HKG:3908) share price has done very well over the last month, posting an excellent gain of 66%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.2% in the last twelve months.

Since its price has surged higher, China International Capital's price-to-earnings (or "P/E") ratio of 14.6x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, China International Capital's earnings have gone into reverse gear, which is not great. 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.

View our latest analysis for China International Capital

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

Is There Enough Growth For China International Capital?

There's an inherent assumption that a company should far outperform the market for P/E ratios like China International Capital's to be considered reasonable.

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 38%. This means it has also seen a slide in earnings over the longer-term as EPS is down 55% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 25% per annum over the next three years. That's shaping up to be materially higher than the 12% per annum growth forecast for the broader market.

With this information, we can see why China International Capital is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From China International Capital's P/E?

Shares in China International Capital have built up some good momentum lately, which has really inflated its 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 China International Capital'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. It's hard to see the share price falling strongly in the near future under these circumstances.

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 China International Capital with six simple checks.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.