WuXi XDC Cayman Inc.'s (HKG:2268) P/E Still Appears To Be Reasonable

WuXi XDC Cayman Inc.'s (HKG:2268) price-to-earnings (or "P/E") ratio of 50.9x 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 7x are quite common. 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.

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Recent times have been advantageous for WuXi XDC Cayman as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for WuXi XDC Cayman

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Does Growth Match The High P/E?

In order to justify its P/E ratio, WuXi XDC Cayman 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 222%. The latest three year period has also seen an excellent 871% 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 34% per annum as estimated by the analysts watching the company. 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 WuXi XDC Cayman 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 WuXi XDC Cayman's P/E?

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 WuXi XDC Cayman 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with WuXi XDC Cayman, and understanding should be part of your investment process.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.