There's Reason For Concern Over Hangzhou Kaierda Welding Robot Co.,Ltd.'s (SHSE:688255) Massive 30% Price Jump

Hangzhou Kaierda Welding Robot Co.,Ltd. (SHSE:688255) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

Since its price has surged higher, Hangzhou Kaierda Welding RobotLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 65x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Hangzhou Kaierda Welding RobotLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hangzhou Kaierda Welding RobotLtd

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 Hangzhou Kaierda Welding RobotLtd's earnings, revenue and cash flow.

Is There Enough Growth For Hangzhou Kaierda Welding RobotLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Hangzhou Kaierda Welding RobotLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 53%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 67% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hangzhou Kaierda Welding RobotLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hangzhou Kaierda Welding RobotLtd's P/E?

Hangzhou Kaierda Welding RobotLtd'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 Hangzhou Kaierda Welding RobotLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Hangzhou Kaierda Welding RobotLtd (1 is concerning!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.