Beijing Hengyu Datacom Aviation Equipment co., LTD.'s (SZSE:300965) 30% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

Unfortunately for some shareholders, the Beijing Hengyu Datacom Aviation Equipment co., LTD. (SZSE:300965) share price has dived 30% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 49% in that time.

Although its price has dipped substantially, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Beijing Hengyu Datacom Aviation Equipment as a stock to potentially avoid with its 40.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's exceedingly strong of late, Beijing Hengyu Datacom Aviation Equipment has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Beijing Hengyu Datacom Aviation Equipment

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 Beijing Hengyu Datacom Aviation Equipment's earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Beijing Hengyu Datacom Aviation Equipment would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 330% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 72% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 36% 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 Beijing Hengyu Datacom Aviation Equipment 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

Beijing Hengyu Datacom Aviation Equipment's P/E hasn't come down all the way after its stock plunged. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Beijing Hengyu Datacom Aviation Equipment 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. 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.

You always need to take note of risks, for example - Beijing Hengyu Datacom Aviation Equipment has 2 warning signs we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.