With a price-to-earnings (or "P/E") ratio of 34.8x Shanghai Chicmax Cosmetic Co., Ltd. (HKG:2145) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x 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.
Recent times have been advantageous for Shanghai Chicmax Cosmetic as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Shanghai Chicmax Cosmetic
How Is Shanghai Chicmax Cosmetic's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Chicmax Cosmetic's to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 19%. The latest three year period has also seen an excellent 256% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the analysts watching 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. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Shanghai Chicmax Cosmetic's P/E
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 Shanghai Chicmax Cosmetic'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.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Shanghai Chicmax Cosmetic (1 doesn't sit too well with us!) that you need to be mindful of.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.