Walvax Biotechnology Co., Ltd.'s (SZSE:300142) price-to-earnings (or "P/E") ratio of 46.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Walvax Biotechnology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Walvax Biotechnology
What Are Growth Metrics Telling Us About The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Walvax Biotechnology's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. The latest three year period has also seen an excellent 58% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 38% as estimated by the two analysts watching the company. With the market predicted to deliver 44% growth , the company is positioned for a weaker earnings result.
In light of this, it's alarming that Walvax Biotechnology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Walvax Biotechnology's P/E?
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.
Our examination of Walvax Biotechnology's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Walvax Biotechnology with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than Walvax Biotechnology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.