Xiamen Guang Pu Electronics Co., Ltd. (SZSE:300632) Stock Rockets 44% As Investors Are Less Pessimistic Than Expected

The Xiamen Guang Pu Electronics Co., Ltd. (SZSE:300632) share price has done very well over the last month, posting an excellent gain of 44%. Looking further back, the 12% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Xiamen Guang Pu Electronics as a stock to avoid entirely with its 72x 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 so lofty.

Xiamen Guang Pu Electronics has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Xiamen Guang Pu Electronics

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Xiamen Guang Pu Electronics will help you shine a light on its historical performance.

Is There Enough Growth For Xiamen Guang Pu Electronics?

The only time you'd be truly comfortable seeing a P/E as steep as Xiamen Guang Pu Electronics' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 12% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 57% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Xiamen Guang Pu Electronics is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

The strong share price surge has got Xiamen Guang Pu Electronics' P/E rushing to great heights as well. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Xiamen Guang Pu Electronics revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Xiamen Guang Pu Electronics (at least 3 which are concerning), and understanding them should be part of your investment process.

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.