Getting In Cheap On Zhaojin Mining Industry Company Limited (HKG:1818) Might Be Difficult

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 11x, you may consider Zhaojin Mining Industry Company Limited (HKG:1818) as a stock to avoid entirely with its 41.7x 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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Zhaojin Mining Industry certainly has been doing a good job lately as it's been growing earnings more 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.

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Is There Enough Growth For Zhaojin Mining Industry?

In order to justify its P/E ratio, Zhaojin Mining Industry 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 196%. Pleasingly, EPS has also lifted 1,804% in aggregate from three years ago, 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.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% per year over the next three years. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

With this information, we can see why Zhaojin Mining Industry 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.

The Key Takeaway

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 Zhaojin Mining Industry 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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Zhaojin Mining Industry that we have uncovered.

If these risks are making you reconsider your opinion on Zhaojin Mining Industry, 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.