CGN Mining Company Limited (HKG:1164) Looks Just Right With A 33% Price Jump

CGN Mining Company Limited (HKG:1164) shareholders have had their patience rewarded with a 33% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 18% over that time.

Following the firm bounce in price, CGN Mining's price-to-earnings (or "P/E") ratio of 31.9x 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 11x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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CGN Mining 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for CGN Mining

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

How Is CGN Mining's Growth Trending?

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

If we review the last year of earnings growth, the company posted a worthy increase of 8.2%. Pleasingly, EPS has also lifted 156% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 30% each year as estimated by the nine analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 14% per annum, which is noticeably less attractive.

In light of this, it's understandable that CGN Mining's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On CGN Mining's P/E

The strong share price surge has got CGN Mining's P/E rushing to great heights as well. 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.

We've established that CGN Mining maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 3 warning signs for CGN Mining (2 are significant!) that you need to be mindful of.

If these risks are making you reconsider your opinion on CGN Mining, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.