Zhejiang Jinghua Laser Technology Co.,Ltd's (SHSE:603607) 26% Share Price Surge Not Quite Adding Up

Despite an already strong run, Zhejiang Jinghua Laser Technology Co.,Ltd (SHSE:603607) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Zhejiang Jinghua Laser TechnologyLtd's price-to-earnings (or "P/E") ratio of 34.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 37x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen firmly for Zhejiang Jinghua Laser TechnologyLtd recently, which is pleasing to see. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Zhejiang Jinghua Laser TechnologyLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Jinghua Laser TechnologyLtd will help you shine a light on its historical performance.

How Is Zhejiang Jinghua Laser TechnologyLtd's Growth Trending?

In order to justify its P/E ratio, Zhejiang Jinghua Laser TechnologyLtd would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. However, this wasn't enough as the latest three year period has seen a very unpleasant 15% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Zhejiang Jinghua Laser TechnologyLtd's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Key Takeaway

Zhejiang Jinghua Laser TechnologyLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Zhejiang Jinghua Laser TechnologyLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Zhejiang Jinghua Laser TechnologyLtd (of which 1 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Zhejiang Jinghua Laser TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.