Investors Appear Satisfied With Kehua Data Co., Ltd.'s (SZSE:002335) Prospects As Shares Rocket 33%

Kehua Data Co., Ltd. (SZSE:002335) shares have continued their recent momentum with a 33% gain in the last month alone. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Kehua Data as a stock to potentially avoid with its 46.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings that are retreating more than the market's of late, Kehua Data has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Kehua Data

Keen to find out how analysts think Kehua Data's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Kehua Data?

There's an inherent assumption that a company should outperform the market for P/E ratios like Kehua Data's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. The last three years don't look nice either as the company has shrunk EPS by 27% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 96% during the coming year according to the six analysts following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Kehua Data is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Kehua Data's P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of Kehua Data'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. 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 1 warning sign for Kehua Data you should know about.

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.