Guangdong Hoshion Industrial Aluminium Co., Ltd. (SZSE:002824) Stocks Shoot Up 33% But Its P/E Still Looks Reasonable

Despite an already strong run, Guangdong Hoshion Industrial Aluminium Co., Ltd. (SZSE:002824) shares have been powering on, with a gain of 33% 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.

Since its price has surged higher, Guangdong Hoshion Industrial Aluminium's price-to-earnings (or "P/E") ratio of 40x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Guangdong Hoshion Industrial Aluminium has been struggling lately as its earnings have declined faster 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 Guangdong Hoshion Industrial Aluminium

Keen to find out how analysts think Guangdong Hoshion Industrial Aluminium's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Guangdong Hoshion Industrial Aluminium's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Guangdong Hoshion Industrial Aluminium's is when the company's growth is on track to outshine the market.

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 30%. As a result, earnings from three years ago have also fallen 25% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 29% per annum during the coming three years according to the two analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 18% per annum, which is noticeably less attractive.

With this information, we can see why Guangdong Hoshion Industrial Aluminium is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The large bounce in Guangdong Hoshion Industrial Aluminium'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 Guangdong Hoshion Industrial Aluminium maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Guangdong Hoshion Industrial Aluminium that you need to take into consideration.

Of course, you might also be able to find a better stock than Guangdong Hoshion Industrial Aluminium. 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.