Huaxia Eye Hospital Group Co.,Ltd.'s (SZSE:301267) 43% Price Boost Is Out Of Tune With Earnings

Huaxia Eye Hospital Group Co.,Ltd. (SZSE:301267) shareholders would be excited to see that the share price has had a great month, posting a 43% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

After such a large jump in price, Huaxia Eye Hospital GroupLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 35.5x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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.

Recent times haven't been advantageous for Huaxia Eye Hospital GroupLtd as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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.

Check out our latest analysis for Huaxia Eye Hospital GroupLtd

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Is There Enough Growth For Huaxia Eye Hospital GroupLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Huaxia Eye Hospital GroupLtd's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 16% in total. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the six analysts covering the company suggest earnings should grow by 20% per year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.

In light of this, it's curious that Huaxia Eye Hospital GroupLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Huaxia Eye Hospital GroupLtd shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Huaxia Eye Hospital GroupLtd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 1 warning sign for Huaxia Eye Hospital GroupLtd you should be aware of.

If these risks are making you reconsider your opinion on Huaxia Eye Hospital GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.