Why Investors Shouldn't Be Surprised By KEDE Numerical Control Co., Ltd.'s (SHSE:688305) 30% Share Price Surge

KEDE Numerical Control Co., Ltd. (SHSE:688305) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.5% over the last year.

Since its price has surged higher, KEDE Numerical Control's price-to-earnings (or "P/E") ratio of 72.9x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x 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 highly elevated P/E.

Recent times have been pleasing for KEDE Numerical Control as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for KEDE Numerical Control

If you'd like to see what analysts are forecasting going forward, you should check out our free report on KEDE Numerical Control.

Is There Enough Growth For KEDE Numerical Control?

The only time you'd be truly comfortable seeing a P/E as steep as KEDE Numerical Control's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 66%. The strong recent performance means it was also able to grow EPS by 112% 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.

Looking ahead now, EPS is anticipated to climb by 57% during the coming year according to the dual analysts following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

With this information, we can see why KEDE Numerical Control is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

KEDE Numerical Control's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of KEDE Numerical Control'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for KEDE Numerical Control with six simple checks.

If these risks are making you reconsider your opinion on KEDE Numerical Control, 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.