CITIC Offshore Helicopter Co., Ltd. (SZSE:000099) shareholders have had their patience rewarded with a 32% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 35%.
Since its price has surged higher, CITIC Offshore Helicopter's price-to-earnings (or "P/E") ratio of 37.1x 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 29x and even P/E's below 18x 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 as high as it is.
CITIC Offshore Helicopter 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. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like CITIC Offshore Helicopter's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 8.2%. However, this wasn't enough as the latest three year period has seen an unpleasant 11% overall drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 14% as estimated by the sole analyst watching the company. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
In light of this, it's alarming that CITIC Offshore Helicopter's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.
What We Can Learn From CITIC Offshore Helicopter's P/E?
CITIC Offshore Helicopter shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that CITIC Offshore Helicopter currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for CITIC Offshore Helicopter with six simple checks on some of these key factors.
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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