Why Investors Shouldn't Be Surprised By Hunan Yujing Machinery Co.,Ltd's (SZSE:002943) 28% Share Price Surge

Hunan Yujing Machinery Co.,Ltd (SZSE:002943) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.5% in the last twelve months.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Hunan Yujing MachineryLtd as a stock to avoid entirely with its 45.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times haven't been advantageous for Hunan Yujing MachineryLtd as its earnings have been falling quicker 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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What Are Growth Metrics Telling Us About The High P/E?

Hunan Yujing MachineryLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 2,704% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 61% per annum over the next three years. That's shaping up to be materially higher than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Hunan Yujing MachineryLtd'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.

What We Can Learn From Hunan Yujing MachineryLtd's P/E?

The strong share price surge has got Hunan Yujing MachineryLtd's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Hunan Yujing MachineryLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Hunan Yujing MachineryLtd (2 can't be ignored) you should be aware of.

If you're unsure about the strength of Hunan Yujing MachineryLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.