With a price-to-earnings (or "P/E") ratio of 26.4x WuXi Biologics (Cayman) Inc. (HKG:2269) 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 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

While the market has experienced earnings growth lately, WuXi Biologics (Cayman)'s earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for WuXi Biologics (Cayman)

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What Are Growth Metrics Telling Us About The High P/E?

WuXi Biologics (Cayman)'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, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 36%. The last three years don't look nice either as the company has shrunk EPS by 6.0% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 23% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 13% each year growth forecast for the broader market.

In light of this, it's understandable that WuXi Biologics (Cayman)'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 Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of WuXi Biologics (Cayman)'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. Unless these conditions change, they will continue to provide strong support to the share price.

You always need to take note of risks, for example - WuXi Biologics (Cayman) has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on WuXi Biologics (Cayman), explore our interactive list of high quality stocks to get an idea of what else is out there.

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