Why Investors Shouldn't Be Surprised By Pansoft Company Limited's (SZSE:300996) 42% Share Price Surge

The Pansoft Company Limited (SZSE:300996) share price has done very well over the last month, posting an excellent gain of 42%. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

After such a large jump in price, Pansoft may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 50.9x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Pansoft has been very sluggish. 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.

See our latest analysis for Pansoft

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

How Is Pansoft's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Pansoft's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 18% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 58% as estimated by the three analysts watching the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Pansoft's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The large bounce in Pansoft's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Pansoft's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Pansoft that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.