Guo Tai Epoint Software Co.,Ltd's (SHSE:688232) 39% Share Price Surge Not Quite Adding Up

Guo Tai Epoint Software Co.,Ltd (SHSE:688232) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 47% in the last year.

After such a large jump in price, Guo Tai Epoint SoftwareLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43.4x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Guo Tai Epoint SoftwareLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Guo Tai Epoint SoftwareLtd's Growth Trending?

In order to justify its P/E ratio, Guo Tai Epoint SoftwareLtd would need to produce impressive growth in excess of 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 16%. As a result, earnings from three years ago have also fallen 49% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 18% during the coming year according to the five analysts following the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's alarming that Guo Tai Epoint SoftwareLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are 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 Guo Tai Epoint SoftwareLtd's P/E?

Guo Tai Epoint SoftwareLtd's P/E is getting right up there since its shares have risen strongly. 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 Guo Tai Epoint SoftwareLtd currently trades on a much 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 2 warning signs for Guo Tai Epoint SoftwareLtd that we have uncovered.

If you're unsure about the strength of Guo Tai Epoint 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.