Earnings Tell The Story For Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) As Its Stock Soars 29%

The Foshan Electrical and Lighting Co.,Ltd (SZSE:000541) share price has done very well over the last month, posting an excellent gain of 29%. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Foshan Electrical and LightingLtd's P/E ratio of 39.5x, since the median price-to-earnings (or "P/E") ratio in China is also close to 39x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Foshan Electrical and LightingLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Foshan Electrical and LightingLtd

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What Are Growth Metrics Telling Us About The P/E?

In order to justify its P/E ratio, Foshan Electrical and LightingLtd would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 14% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 36% over the next year. That's shaping up to be similar to the 37% growth forecast for the broader market.

With this information, we can see why Foshan Electrical and LightingLtd is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Key Takeaway

Its shares have lifted substantially and now Foshan Electrical and LightingLtd's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Foshan Electrical and LightingLtd maintains its moderate P/E off the back of its forecast growth being in line with the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

It is also worth noting that we have found 2 warning signs for Foshan Electrical and LightingLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Foshan Electrical and LightingLtd, 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.