Optimistic Investors Push Focus Technology Co., Ltd. (SZSE:002315) Shares Up 41% But Growth Is Lacking

Focus Technology Co., Ltd. (SZSE:002315) shareholders would be excited to see that the share price has had a great month, posting a 41% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 82%.

Although its price has surged higher, it's still not a stretch to say that Focus Technology's price-to-earnings (or "P/E") ratio of 29.7x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 30x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been pleasing for Focus Technology as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Focus Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Focus Technology.

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

In order to justify its P/E ratio, Focus Technology would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. Pleasingly, EPS has also lifted 110% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the three analysts watching the company. With the market predicted to deliver 22% growth per annum, the company is positioned for a weaker earnings result.

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

What We Can Learn From Focus Technology's P/E?

Focus Technology's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Focus Technology currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Focus Technology that we have uncovered.

Of course, you might also be able to find a better stock than Focus Technology. 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.