Optimistic Investors Push Weichai Heavy Machinery Co., Ltd. (SZSE:000880) Shares Up 51% But Growth Is Lacking

Despite an already strong run, Weichai Heavy Machinery Co., Ltd. (SZSE:000880) shares have been powering on, with a gain of 51% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 72% in the last year.

Although its price has surged higher, there still wouldn't be many who think Weichai Heavy Machinery's price-to-earnings (or "P/E") ratio of 34.4x is worth a mention when the median P/E in China is similar at about 36x. 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.

Earnings have risen firmly for Weichai Heavy Machinery recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Weichai Heavy Machinery

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Weichai Heavy Machinery's earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Weichai Heavy Machinery's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 11% gain to the company's bottom line. EPS has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it interesting that Weichai Heavy Machinery is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Weichai Heavy Machinery's P/E

Weichai Heavy Machinery appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Weichai Heavy Machinery currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Weichai Heavy Machinery that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.