Hefei Chipmore Technology Co.,Ltd.'s (SHSE:688352) P/E Is Still On The Mark Following 29% Share Price Bounce

Those holding Hefei Chipmore Technology Co.,Ltd. (SHSE:688352) shares would be relieved that the share price has rebounded 29% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. 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.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Hefei Chipmore TechnologyLtd as a stock to potentially avoid with its 35.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

The recent earnings growth at Hefei Chipmore TechnologyLtd would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hefei Chipmore TechnologyLtd

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

How Is Hefei Chipmore TechnologyLtd's Growth Trending?

In order to justify its P/E ratio, Hefei Chipmore TechnologyLtd would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. The latest three year period has also seen an excellent 419% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is only predicted to deliver 41% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.

With this information, we can see why Hefei Chipmore TechnologyLtd is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Key Takeaway

The large bounce in Hefei Chipmore TechnologyLtd's shares has lifted the company's P/E to a fairly high level. 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.

As we suspected, our examination of Hefei Chipmore TechnologyLtd revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Hefei Chipmore TechnologyLtd with six simple checks on some of these key factors.

If you're unsure about the strength of Hefei Chipmore TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.