After Leaping 29% WuXi Biologics (Cayman) Inc. (HKG:2269) Shares Are Not Flying Under The Radar

WuXi Biologics (Cayman) Inc. (HKG:2269) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 69% share price drop in the last twelve months.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider WuXi Biologics (Cayman) as a stock to avoid entirely with its 19.5x 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.

WuXi Biologics (Cayman) hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for WuXi Biologics (Cayman)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on WuXi Biologics (Cayman).

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

In order to justify its P/E ratio, WuXi Biologics (Cayman) would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 36%. The last three years don't look nice either as the company has shrunk EPS by 6.3% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 24% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 12% per annum, which is noticeably less attractive.

In light of this, it's understandable that WuXi Biologics (Cayman)'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.

What We Can Learn From WuXi Biologics (Cayman)'s P/E?

The strong share price surge has got WuXi Biologics (Cayman)'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 WuXi Biologics (Cayman)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for WuXi Biologics (Cayman) you should be aware of.

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.