With a price-to-earnings (or "P/E") ratio of 50.6x Yueyang Xingchang Petro-Chemical Co., Ltd. (SZSE:000819) may be sending very bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 19x 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.
The earnings growth achieved at Yueyang Xingchang Petro-Chemical over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
See our latest analysis for Yueyang Xingchang Petro-Chemical
Is There Enough Growth For Yueyang Xingchang Petro-Chemical?
The only time you'd be truly comfortable seeing a P/E as steep as Yueyang Xingchang Petro-Chemical's is when the company's growth is on track to outshine the market decidedly.
Taking a look back first, we see that the company grew earnings per share by an impressive 24% last year. The latest three year period has also seen an excellent 467% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 43% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Yueyang Xingchang Petro-Chemical's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Bottom Line On Yueyang Xingchang Petro-Chemical's P/E
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Yueyang Xingchang Petro-Chemical maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, 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 the recent medium-term conditions change, they will continue to provide strong support to the share price.
It is also worth noting that we have found 1 warning sign for Yueyang Xingchang Petro-Chemical that you need to take into consideration.
If these risks are making you reconsider your opinion on Yueyang Xingchang Petro-Chemical, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.