Xiaomi Corporation's (HKG:1810) Stock Retreats 33% But Earnings Haven't Escaped The Attention Of Investors

The Xiaomi Corporation (HKG:1810) share price has softened a substantial 33% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 135%.

Even after such a large drop in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 10x, you may still consider Xiaomi as a stock to avoid entirely with its 36.4x 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.

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Recent times have been advantageous for Xiaomi as its earnings have been rising faster 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.

View our latest analysis for Xiaomi

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Xiaomi's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. EPS has also lifted 21% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 32% per year as estimated by the analysts watching the company. With the market only predicted to deliver 14% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Xiaomi'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 Bottom Line On Xiaomi's P/E

A significant share price dive has done very little to deflate Xiaomi's very lofty 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.

We've established that Xiaomi maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Xiaomi with six simple checks.

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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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.