Why Investors Shouldn't Be Surprised By Dongguan Dingtong Precision Metal Co., Ltd.'s (SHSE:688668) 40% Share Price Surge

Despite an already strong run, Dongguan Dingtong Precision Metal Co., Ltd. (SHSE:688668) shares have been powering on, with a gain of 40% in the last thirty days. The last 30 days bring the annual gain to a very sharp 39%.

After such a large jump in price, Dongguan Dingtong Precision Metal may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 77.4x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x 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.

Recent times have been pleasing for Dongguan Dingtong Precision Metal 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Dongguan Dingtong Precision Metal's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 4.5%. Still, lamentably EPS has fallen 27% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 68% during the coming year according to the three analysts following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Dongguan Dingtong Precision Metal 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.

What We Can Learn From Dongguan Dingtong Precision Metal's P/E?

Dongguan Dingtong Precision Metal's P/E is flying high just like its stock has during the last month. 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.

We've established that Dongguan Dingtong Precision Metal maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 2 warning signs with Dongguan Dingtong Precision Metal, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Dongguan Dingtong Precision Metal, 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.