What Guangzhou Huayan Precision Machinery Co.,Ltd.'s (SZSE:301138) 36% Share Price Gain Is Not Telling You

Guangzhou Huayan Precision Machinery Co.,Ltd. (SZSE:301138) shareholders have had their patience rewarded with a 36% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 2.4% isn't as impressive.

Following the firm bounce in price, Guangzhou Huayan Precision MachineryLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 49x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

As an illustration, earnings have deteriorated at Guangzhou Huayan Precision MachineryLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, 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.

See our latest analysis for Guangzhou Huayan Precision MachineryLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Guangzhou Huayan Precision MachineryLtd will help you shine a light on its historical performance.

Is There Enough Growth For Guangzhou Huayan Precision MachineryLtd?

Guangzhou Huayan Precision MachineryLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 3.5%. As a result, earnings from three years ago have also fallen 38% overall. 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.

In light of this, it's alarming that Guangzhou Huayan Precision MachineryLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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

The large bounce in Guangzhou Huayan Precision MachineryLtd's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Guangzhou Huayan Precision MachineryLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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 - Guangzhou Huayan Precision MachineryLtd has 3 warning signs we think you should be aware of.

You might be able to find a better investment than Guangzhou Huayan Precision MachineryLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.