HMT (Xiamen) New Technical Materials Co., Ltd (SHSE:603306) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

HMT (Xiamen) New Technical Materials Co., Ltd (SHSE:603306) shares have continued their recent momentum with a 32% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 73%.

Since its price has surged higher, HMT (Xiamen) New Technical Materials may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 42.5x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for HMT (Xiamen) New Technical Materials as its earnings have risen in spite of the market's earnings going into reverse. 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 HMT (Xiamen) New Technical Materials

If you'd like to see what analysts are forecasting going forward, you should check out our free report on HMT (Xiamen) New Technical Materials.

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

There's an inherent assumption that a company should outperform the market for P/E ratios like HMT (Xiamen) New Technical Materials' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. The strong recent performance means it was also able to grow EPS by 38% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 13% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we find it concerning that HMT (Xiamen) New Technical Materials is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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 Bottom Line On HMT (Xiamen) New Technical Materials' P/E

HMT (Xiamen) New Technical Materials shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of HMT (Xiamen) New Technical Materials' 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.

Before you settle on your opinion, we've discovered 1 warning sign for HMT (Xiamen) New Technical Materials that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.