Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) Stock Rockets 26% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Guangdong Huicheng Vacuum Technology Co., Ltd. (SZSE:301392) shares have been powering on, with a gain of 26% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Guangdong Huicheng Vacuum Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 69.8x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x 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.

Guangdong Huicheng Vacuum Technology has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable 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 Guangdong Huicheng Vacuum Technology

Although there are no analyst estimates available for Guangdong Huicheng Vacuum Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Guangdong Huicheng Vacuum Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Guangdong Huicheng Vacuum Technology's 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 3.6% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 2.3% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 42% 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 Guangdong Huicheng Vacuum Technology is trading at a P/E higher than the market. 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. 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 Bottom Line On Guangdong Huicheng Vacuum Technology's P/E

The strong share price surge has got Guangdong Huicheng Vacuum Technology's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Guangdong Huicheng Vacuum Technology 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.

Before you settle on your opinion, we've discovered 3 warning signs for Guangdong Huicheng Vacuum Technology (2 are potentially serious!) that you should be aware of.

If you're unsure about the strength of Guangdong Huicheng Vacuum Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.