Why Investors Shouldn't Be Surprised By Hoymiles Power Electronics Inc.'s (SHSE:688032) 26% Share Price Surge

Hoymiles Power Electronics Inc. (SHSE:688032) shares have continued their recent momentum with a 26% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 9.7% over the last year.

Following the firm bounce in price, Hoymiles Power Electronics may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58.6x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 so lofty.

Hoymiles Power Electronics has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 steep as Hoymiles Power Electronics' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 48%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 71% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 43% per year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

With this information, we can see why Hoymiles Power Electronics is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Hoymiles Power Electronics have built up some good momentum lately, which has really inflated its 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.

As we suspected, our examination of Hoymiles Power Electronics' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Hoymiles Power Electronics (2 are significant!) that we have uncovered.

If these risks are making you reconsider your opinion on Hoymiles Power Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.