Earnings Tell The Story For Shanghai Chicmax Cosmetic Co., Ltd. (HKG:2145) As Its Stock Soars 25%

Despite an already strong run, Shanghai Chicmax Cosmetic Co., Ltd. (HKG:2145) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 79%.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Shanghai Chicmax Cosmetic as a stock to avoid entirely with its 40.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's superior to most other companies of late, Shanghai Chicmax Cosmetic has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shanghai Chicmax Cosmetic

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Shanghai Chicmax Cosmetic would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 184%. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 43% per year during the coming three years according to the seven analysts following the company. That's shaping up to be materially higher than the 14% per year growth forecast for the broader market.

With this information, we can see why Shanghai Chicmax Cosmetic 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 Shanghai Chicmax Cosmetic's P/E?

Shanghai Chicmax Cosmetic's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Chicmax Cosmetic maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Shanghai Chicmax Cosmetic is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Shanghai Chicmax Cosmetic. 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.