WuXi Biologics (Cayman) Inc. (HKG:2269) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 182% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, WuXi Biologics (Cayman) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 35.8x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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There hasn't been much to differentiate WuXi Biologics (Cayman)'s and the market's earnings growth lately. It might be that many expect the mediocre earnings performance to strengthen positively, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for WuXi Biologics (Cayman)

If you'd like to see what analysts are forecasting going forward, you should check out our free report on WuXi Biologics (Cayman).

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.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Likewise, not much has changed from three years ago as earnings have been stuck during that whole time. Therefore, it's fair to say that earnings growth has definitely eluded the company recently.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 18% per annum over the next three years. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader market.

With this information, we can see why WuXi Biologics (Cayman) 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 WuXi Biologics (Cayman)'s P/E

Shares in WuXi Biologics (Cayman) have built up some good momentum lately, which has really inflated its 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 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. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 1 warning sign for WuXi Biologics (Cayman) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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