Optimistic Investors Push Hiecise Precision Equipment Co.,Ltd. (SZSE:300809) Shares Up 27% But Growth Is Lacking

Hiecise Precision Equipment Co.,Ltd. (SZSE:300809) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 25% in the last year.

Since its price has surged higher, Hiecise Precision EquipmentLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 56.8x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Hiecise Precision EquipmentLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hiecise Precision EquipmentLtd

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What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings growth, the company posted a terrific increase of 279%. The strong recent performance means it was also able to grow EPS by 294% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 9.1% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

With this information, we find it concerning that Hiecise Precision EquipmentLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

The strong share price surge has got Hiecise Precision EquipmentLtd'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.

Our examination of Hiecise Precision EquipmentLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Hiecise Precision EquipmentLtd (1 makes us a bit uncomfortable!) that you need to take into consideration.

Of course, you might also be able to find a better stock than Hiecise Precision EquipmentLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.