Geely Automobile Holdings Limited's (HKG:175) price-to-earnings (or "P/E") ratio of 14x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 4x are quite common. 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.
Geely Automobile Holdings 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 Geely Automobile Holdings
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Geely Automobile Holdings' is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. Still, incredibly EPS has fallen 27% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 29% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 16% each year, which is noticeably less attractive.
In light of this, it's understandable that Geely Automobile Holdings' 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 Final Word
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 Geely Automobile Holdings' 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.
It is also worth noting that we have found 1 warning sign for Geely Automobile Holdings that you need to take into consideration.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.