Investors Appear Satisfied With E-Star Commercial Management Company Limited's (HKG:6668) Prospects As Shares Rocket 25%

Despite an already strong run, E-Star Commercial Management Company Limited (HKG:6668) shares have been powering on, with a gain of 25% in the last thirty days. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, E-Star Commercial Management may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 27.9x, since almost half of all companies in Hong Kong have P/E ratios under 11x and even P/E's lower than 6x 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.

E-Star Commercial Management 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.

View our latest analysis for E-Star Commercial Management

Want the full picture on analyst estimates for the company? Then our free report on E-Star Commercial Management will help you uncover what's on the horizon.

Does Growth Match The High P/E?

In order to justify its P/E ratio, E-Star Commercial Management 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 35%. The latest three year period has also seen an excellent 114% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 22% each year as estimated by the one analyst watching the company. That's shaping up to be materially higher than the 20% per annum growth forecast for the broader market.

With this information, we can see why E-Star Commercial Management 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 E-Star Commercial Management's P/E

E-Star Commercial Management's P/E is flying high just like its stock has during the last month. 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 E-Star Commercial Management'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. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - E-Star Commercial Management has 1 warning sign we think you should be aware of.

You might be able to find a better investment than E-Star Commercial Management. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a P/E below 20x (but have proven they can grow earnings).

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