Why Investors Shouldn't Be Surprised By Guangdong Aofei Data Technology Co., Ltd.'s (SZSE:300738) 28% Share Price Surge

Despite an already strong run, Guangdong Aofei Data Technology Co., Ltd. (SZSE:300738) shares have been powering on, with a gain of 28% in the last thirty days. Looking further back, the 22% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, Guangdong Aofei Data Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.7x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 20x 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.

Guangdong Aofei Data Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Guangdong Aofei Data Technology

Keen to find out how analysts think Guangdong Aofei Data Technology's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Guangdong Aofei Data Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 47% each year as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 26% per year, which is noticeably less attractive.

With this information, we can see why Guangdong Aofei Data Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Guangdong Aofei Data Technology's P/E

Shares in Guangdong Aofei Data Technology 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.

We've established that Guangdong Aofei Data Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

You need to take note of risks, for example - Guangdong Aofei Data Technology has 3 warning signs (and 2 which are concerning) we think you should know about.

If these risks are making you reconsider your opinion on Guangdong Aofei Data Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.