Hangzhou Weiguang Electronic Co.,Ltd.'s (SZSE:002801) Shares May Have Run Too Fast Too Soon

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Hangzhou Weiguang Electronic Co.,Ltd. (SZSE:002801) as a stock to potentially avoid with its 38.7x 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.

For example, consider that Hangzhou Weiguang ElectronicLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Hangzhou Weiguang ElectronicLtd

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 Hangzhou Weiguang ElectronicLtd's earnings, revenue and cash flow.

Is There Enough Growth For Hangzhou Weiguang ElectronicLtd?

The only time you'd be truly comfortable seeing a P/E as high as Hangzhou Weiguang ElectronicLtd's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 51%. The last three years don't look nice either as the company has shrunk EPS by 39% in aggregate. Accordingly, shareholders would have felt downbeat about 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 downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Hangzhou Weiguang ElectronicLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

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 Hangzhou Weiguang ElectronicLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Hangzhou Weiguang ElectronicLtd that you should be aware of.

If these risks are making you reconsider your opinion on Hangzhou Weiguang ElectronicLtd, 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.