With a price-to-earnings (or "P/E") ratio of 28.4x Shanghai Chicmax Cosmetic Co., Ltd. (HKG:2145) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x 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.

Shanghai Chicmax Cosmetic 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.

How Is Shanghai Chicmax Cosmetic's Growth Trending?

In order to justify its P/E ratio, Shanghai Chicmax Cosmetic 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 184%. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 43% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 15% each year, which is noticeably less attractive.

With this information, we can see why Shanghai Chicmax Cosmetic 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 Bottom Line On Shanghai Chicmax Cosmetic's P/E

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Shanghai Chicmax Cosmetic'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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Shanghai Chicmax Cosmetic with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Shanghai Chicmax Cosmetic's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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