Suzhou Recodeal Interconnect System Co.,Ltd (SHSE:688800) Looks Just Right With A 39% Price Jump

Despite an already strong run, Suzhou Recodeal Interconnect System Co.,Ltd (SHSE:688800) shares have been powering on, with a gain of 39% in the last thirty days. The last 30 days bring the annual gain to a very sharp 38%.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 37x, you may consider Suzhou Recodeal Interconnect SystemLtd as a stock to avoid entirely with its 56.8x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Suzhou Recodeal Interconnect SystemLtd have been in line with the market. It might be that many expect the company's earnings to strengthen positively despite the tough market conditions, which has kept the P/E from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Suzhou Recodeal Interconnect SystemLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Suzhou Recodeal Interconnect SystemLtd.

Does Growth Match The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 2.2%. Still, the latest three year period has seen an excellent 34% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 50% as estimated by the five analysts watching the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Suzhou Recodeal Interconnect SystemLtd'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.

What We Can Learn From Suzhou Recodeal Interconnect SystemLtd's P/E?

The strong share price surge has got Suzhou Recodeal Interconnect SystemLtd's P/E rushing to great heights as well. 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.

We've established that Suzhou Recodeal Interconnect SystemLtd 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. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Suzhou Recodeal Interconnect SystemLtd (of which 1 is a bit concerning!) you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.