Despite an already strong run, West China Cement Limited (HKG:2233) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 205% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about West China Cement's P/E ratio of 13.2x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 12x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Recent times have been advantageous for West China Cement as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for West China Cement

If you'd like to see what analysts are forecasting going forward, you should check out our free report on West China Cement.

Is There Some Growth For West China Cement?

West China Cement's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 257% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 17% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 20% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 15% per year, which is noticeably less attractive.

With this information, we find it interesting that West China Cement is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On West China Cement's P/E

West China Cement appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 West China Cement currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 2 warning signs for West China Cement (1 is a bit concerning!) that you need to take into consideration.

Of course, you might also be able to find a better stock than West China Cement. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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