With a price-to-earnings (or "P/E") ratio of 15.7x China Mengniu Dairy Company Limited (HKG:2319) 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 4x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for China Mengniu Dairy as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for China Mengniu Dairy
SEHK:2319 Price to Earnings Ratio vs Industry December 26th 2023
Keen to find out how analysts think China Mengniu Dairy's future stacks up against the industry? In that case, our free report is a great place to start.
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like China Mengniu Dairy's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 22%. Even so, admirably EPS has lifted 41% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% per year, which is noticeably less attractive.
In light of this, it's understandable that China Mengniu Dairy's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On China Mengniu Dairy'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.
As we suspected, our examination of China Mengniu Dairy's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
We don't want to rain on the parade too much, but we did also find 2 warning signs for China Mengniu Dairy that you need to be mindful of.
If you're unsure about the strength of China Mengniu Dairy'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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