Wuxi New Hongtai Electrical Technology Co.,Ltd's (SHSE:603016) Shares Climb 27% But Its Business Is Yet to Catch Up

Wuxi New Hongtai Electrical Technology Co.,Ltd (SHSE:603016) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.7% over the last year.

Since its price has surged higher, Wuxi New Hongtai Electrical TechnologyLtd's price-to-earnings (or "P/E") ratio of 39.7x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 26x and even P/E's below 16x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Earnings have risen firmly for Wuxi New Hongtai Electrical TechnologyLtd recently, which is pleasing to see. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Wuxi New Hongtai Electrical TechnologyLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Wuxi New Hongtai Electrical TechnologyLtd's earnings, revenue and cash flow.

Is There Enough Growth For Wuxi New Hongtai Electrical TechnologyLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Wuxi New Hongtai Electrical TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.6% last year. The latest three year period has also seen a 13% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Wuxi New Hongtai Electrical TechnologyLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Wuxi New Hongtai Electrical TechnologyLtd's P/E?

Wuxi New Hongtai Electrical TechnologyLtd's P/E is flying high just like its stock has during the last month. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Wuxi New Hongtai Electrical TechnologyLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Wuxi New Hongtai Electrical TechnologyLtd you should know about.

Of course, you might also be able to find a better stock than Wuxi New Hongtai Electrical TechnologyLtd. 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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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.