After Leaping 28% Wetown Electric Group Co., Ltd. (SHSE:688226) Shares Are Not Flying Under The Radar

Despite an already strong run, Wetown Electric Group Co., Ltd. (SHSE:688226) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 151% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 37x, you may consider Wetown Electric Group as a stock to potentially avoid with its 45.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Wetown Electric Group as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Wetown Electric Group

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

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

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

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. The strong recent performance means it was also able to grow EPS by 52% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 63% over the next year. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we can see why Wetown Electric Group 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.

What We Can Learn From Wetown Electric Group's P/E?

Wetown Electric Group's P/E is getting right up there since its shares have risen strongly. 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 Wetown Electric Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Wetown Electric Group (at least 2 which shouldn't be ignored), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Wetown Electric Group, 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.