Hoymiles Power Electronics Inc.'s (SHSE:688032) 34% Price Boost Is Out Of Tune With Earnings

Hoymiles Power Electronics Inc. (SHSE:688032) shares have had a really impressive month, gaining 34% after a shaky period beforehand. But the last month did very little to improve the 55% share price decline over the last year.

Following the firm bounce in price, Hoymiles Power Electronics' price-to-earnings (or "P/E") ratio of 36.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

There hasn't been much to differentiate Hoymiles Power Electronics' and the market's retreating earnings lately. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Hoymiles Power Electronics

Keen to find out how analysts think Hoymiles Power Electronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Hoymiles Power Electronics' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Hoymiles Power Electronics' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 2.1% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 276% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 38% during the coming year according to the six analysts following the company. That's shaping up to be similar to the 41% growth forecast for the broader market.

With this information, we find it interesting that Hoymiles Power Electronics is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Hoymiles Power Electronics' P/E?

Hoymiles Power Electronics shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hoymiles Power Electronics currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hoymiles Power Electronics (of which 1 is a bit concerning!) you should know about.

Of course, you might also be able to find a better stock than Hoymiles Power Electronics. 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.