Market Participants Recognise Wuxi Hongsheng Heat Exchanger Manufacturing Co., Ltd.'s (SHSE:603090) Earnings Pushing Shares 30% Higher

Wuxi Hongsheng Heat Exchanger Manufacturing Co., Ltd. (SHSE:603090) shareholders have had their patience rewarded with a 30% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.4% over the last year.

Since its price has surged higher, Wuxi Hongsheng Heat Exchanger Manufacturing may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 45.7x, since almost half of all companies in China have P/E ratios under 37x and even P/E's lower than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at Wuxi Hongsheng Heat Exchanger Manufacturing over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Wuxi Hongsheng Heat Exchanger Manufacturing

Although there are no analyst estimates available for Wuxi Hongsheng Heat Exchanger Manufacturing, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

Wuxi Hongsheng Heat Exchanger Manufacturing's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 60%. Even so, admirably EPS has lifted 627% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 40% shows it's noticeably more attractive on an annualised basis.

In light of this, it's understandable that Wuxi Hongsheng Heat Exchanger Manufacturing's P/E sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The large bounce in Wuxi Hongsheng Heat Exchanger Manufacturing's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Wuxi Hongsheng Heat Exchanger Manufacturing maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Wuxi Hongsheng Heat Exchanger Manufacturing that 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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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.