Why Investors Shouldn't Be Surprised By Wave Cyber (Shanghai)Co., Ltd.'s (SHSE:688718) 27% Share Price Surge

Those holding Wave Cyber (Shanghai)Co., Ltd. (SHSE:688718) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 40% in the last twelve months.

After such a large jump in price, Wave Cyber (Shanghai)Co may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. 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 Wave Cyber (Shanghai)Co 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 Wave Cyber (Shanghai)Co

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How Is Wave Cyber (Shanghai)Co's Growth Trending?

In order to justify its P/E ratio, Wave Cyber (Shanghai)Co would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 50%. Still, incredibly EPS has fallen 26% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 139% as estimated by the two analysts watching the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Wave Cyber (Shanghai)Co's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Wave Cyber (Shanghai)Co's shares has lifted the company's P/E to a fairly high level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Wave Cyber (Shanghai)Co maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Wave Cyber (Shanghai)Co with six simple checks on some of these key factors.

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.