Why Investors Shouldn't Be Surprised By Hunan Friendship&Apollo Commercial Co.,Ltd.'s (SZSE:002277) 26% Share Price Surge

Hunan Friendship&Apollo Commercial Co.,Ltd. (SZSE:002277) shareholders have had their patience rewarded with a 26% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

Following the firm bounce in price, Hunan Friendship&Apollo CommercialLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62.9x, 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Hunan Friendship&Apollo CommercialLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hunan Friendship&Apollo CommercialLtd

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How Is Hunan Friendship&Apollo CommercialLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hunan Friendship&Apollo CommercialLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 49% gain to the company's bottom line. Still, incredibly EPS has fallen 75% in total from three years ago, which is quite disappointing. 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 87% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 36%, which is noticeably less attractive.

In light of this, it's understandable that Hunan Friendship&Apollo CommercialLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Hunan Friendship&Apollo CommercialLtd's P/E?

Shares in Hunan Friendship&Apollo CommercialLtd have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Hunan Friendship&Apollo CommercialLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hunan Friendship&Apollo CommercialLtd (1 is a bit concerning) you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.