Investors Still Waiting For A Pull Back In Hangzhou Honghua Digital Technology Stock Company LTD. (SHSE:688789)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Hangzhou Honghua Digital Technology Stock Company LTD. (SHSE:688789) as a stock to potentially avoid with its 30.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been pleasing for Hangzhou Honghua Digital Technology Stock 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 Hangzhou Honghua Digital Technology Stock

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hangzhou Honghua Digital Technology Stock.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Hangzhou Honghua Digital Technology Stock's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 33% last year. The latest three year period has also seen a 27% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 23% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

In light of this, it's understandable that Hangzhou Honghua Digital Technology Stock'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

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 Hangzhou Honghua Digital Technology Stock'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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hangzhou Honghua Digital Technology Stock that you should be aware of.

If you're unsure about the strength of Hangzhou Honghua Digital Technology Stock's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.