When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Zhaojin Mining Industry Company Limited (HKG:1818) as a stock to avoid entirely with its 28x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Zhaojin Mining Industry certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

Zhaojin Mining Industry's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 136% last year. The strong recent performance means it was also able to grow EPS by 514% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the ten analysts covering the company suggest earnings should grow by 57% over the next year. That's shaping up to be materially higher than the 22% growth forecast for the broader market.

In light of this, it's understandable that Zhaojin Mining Industry's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Zhaojin Mining Industry's P/E?

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhaojin Mining Industry maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Zhaojin Mining Industry that you should be aware of.

If you're unsure about the strength of Zhaojin Mining Industry'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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