When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider China Resources Beer (Holdings) Company Limited (HKG:291) as a stock to avoid entirely with its 17.3x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, China Resources Beer (Holdings) has been doing quite well of late. 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.
View our latest analysis for China Resources Beer (Holdings)
Does Growth Match The High P/E?
In order to justify its P/E ratio, China Resources Beer (Holdings) would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 242% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 15% per year over the next three years. With the market predicted to deliver 15% growth per year, the company is positioned for a comparable earnings result.
In light of this, it's curious that China Resources Beer (Holdings)'s P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.
The Key Takeaway
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.
Our examination of China Resources Beer (Holdings)'s analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
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 China Resources Beer (Holdings) 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.