Risks Still Elevated At These Prices As Beijing Hengyu Datacom Aviation Equipment co., LTD. (SZSE:300965) Shares Dive 26%

To the annoyance of some shareholders, Beijing Hengyu Datacom Aviation Equipment co., LTD. (SZSE:300965) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Even after such a large drop in price, Beijing Hengyu Datacom Aviation Equipment's price-to-earnings (or "P/E") ratio of 50.6x might still make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 28x and even P/E's below 17x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Beijing Hengyu Datacom Aviation Equipment certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

How Is Beijing Hengyu Datacom Aviation Equipment's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Beijing Hengyu Datacom Aviation Equipment's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 330%. However, this wasn't enough as the latest three year period has seen a very unpleasant 72% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

A significant share price dive has done very little to deflate Beijing Hengyu Datacom Aviation Equipment's very lofty P/E. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Beijing Hengyu Datacom Aviation Equipment is showing 2 warning signs in our investment analysis, you should know about.

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.