Why Investors Shouldn't Be Surprised By Zhaojin Mining Industry Company Limited's (HKG:1818) 28% Share Price Surge

Zhaojin Mining Industry Company Limited (HKG:1818) shares have continued their recent momentum with a 28% gain in the last month alone. The annual gain comes to 146% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Zhaojin Mining Industry may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45x, since 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. 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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

With earnings growth that's superior to most other companies of late, Zhaojin Mining Industry has been doing relatively well. 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.

See our latest analysis for Zhaojin Mining Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhaojin Mining Industry.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Zhaojin Mining Industry's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 108% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 1,461% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 32% each year over the next three years. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.

In light of this, it's understandable that Zhaojin Mining Industry's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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

As we suspected, our examination of Zhaojin Mining Industry'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.

You always need to take note of risks, for example - Zhaojin Mining Industry has 1 warning sign we think you should be aware 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.