Beijing Ultrapower Software Co., Ltd.'s (SZSE:300002) Price Is Right But Growth Is Lacking After Shares Rocket 28%

Beijing Ultrapower Software Co., Ltd. (SZSE:300002) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 57%.

Although its price has surged higher, Beijing Ultrapower Software may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.1x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 73x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Beijing Ultrapower Software has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 out of favour.

See our latest analysis for Beijing Ultrapower Software

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

How Is Beijing Ultrapower Software's Growth Trending?

In order to justify its P/E ratio, Beijing Ultrapower Software would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 95%. Pleasingly, EPS has also lifted 295% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 7.8% as estimated by the six analysts watching the company. With the market predicted to deliver 41% growth , that's a disappointing outcome.

In light of this, it's understandable that Beijing Ultrapower Software's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

The Final Word

The latest share price surge wasn't enough to lift Beijing Ultrapower Software's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Beijing Ultrapower Software maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Beijing Ultrapower Software is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Beijing Ultrapower Software'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.