Investors Still Aren't Entirely Convinced By Shanghai Baosight Software Co.,Ltd.'s (SHSE:600845) Earnings Despite 25% Price Jump

Shanghai Baosight Software Co.,Ltd. (SHSE:600845) shareholders have had their patience rewarded with a 25% share price jump in the last month. 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.

Even after such a large jump in price, it's still not a stretch to say that Shanghai Baosight SoftwareLtd's price-to-earnings (or "P/E") ratio of 38.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. 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 Shanghai Baosight SoftwareLtd as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. 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.

View our latest analysis for Shanghai Baosight SoftwareLtd

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How Is Shanghai Baosight SoftwareLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Shanghai Baosight SoftwareLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 2.7% gain to the company's bottom line. This was backed up an excellent period prior to see EPS up by 41% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 39% per year during the coming three years according to the nine analysts following the company. With the market only predicted to deliver 21% each year, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Shanghai Baosight SoftwareLtd is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Shanghai Baosight SoftwareLtd's P/E

Shanghai Baosight SoftwareLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

Our examination of Shanghai Baosight SoftwareLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Having said that, be aware Shanghai Baosight SoftwareLtd is showing 1 warning sign in our investment analysis, you should know about.

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

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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.