EuroEyes International Eye Clinic Limited (HKG:1846) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking further back, the 20% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
After such a large jump in price, EuroEyes International Eye Clinic may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 17.7x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 4x 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.
EuroEyes International Eye Clinic's negative earnings growth of late has neither been better nor worse than most other companies. It might be that many expect the company's earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Check out our latest analysis for EuroEyes International Eye Clinic
How Is EuroEyes International Eye Clinic's Growth Trending?
There's an inherent assumption that a company should far outperform the market for P/E ratios like EuroEyes International Eye Clinic's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.6%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 949% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 22% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 17% per annum growth forecast for the broader market.
In light of this, it's understandable that EuroEyes International Eye Clinic's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From EuroEyes International Eye Clinic's P/E?
EuroEyes International Eye Clinic's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that EuroEyes International Eye Clinic maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for EuroEyes International Eye Clinic with six simple checks.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.