After Leaping 27% Bichamp Cutting Technology (Hunan) Co., Ltd. (SZSE:002843) Shares Are Not Flying Under The Radar

Bichamp Cutting Technology (Hunan) Co., Ltd. (SZSE:002843) shares have continued their recent momentum with a 27% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.6% in the last twelve months.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Bichamp Cutting Technology (Hunan) as a stock to avoid entirely with its 58x 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.

Bichamp Cutting Technology (Hunan) has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Bichamp Cutting Technology (Hunan)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 40% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 53% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Looking ahead now, EPS is anticipated to climb by 140% during the coming year according to the sole analyst following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

In light of this, it's understandable that Bichamp Cutting Technology (Hunan)'s P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Bichamp Cutting Technology (Hunan)'s P/E is flying high just like its stock has during the last month. 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 Bichamp Cutting Technology (Hunan) 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.

Before you settle on your opinion, we've discovered 1 warning sign for Bichamp Cutting Technology (Hunan) that you should be aware of.

If these risks are making you reconsider your opinion on Bichamp Cutting Technology (Hunan), 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.