When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Xinyi Solar Holdings Limited (HKG:968) as a stock to avoid entirely with its 24.6x P/E ratio. 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.

With earnings growth that's inferior to most other companies of late, Xinyi Solar Holdings has been relatively sluggish. It might be that many expect the uninspiring earnings performance to recover significantly, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Xinyi Solar Holdings

SEHK:968 Price Based on Past Earnings April 14th 2022 If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xinyi Solar Holdings.

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

In order to justify its P/E ratio, Xinyi Solar Holdings would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow EPS by an impressive 123% 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 analysts covering the company suggest earnings should grow by 20% each year over the next three years. With the market only predicted to deliver 15% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Xinyi Solar Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Xinyi Solar Holdings' P/E

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.

As we suspected, our examination of Xinyi Solar 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. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Xinyi Solar Holdings with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20x).

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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.