Dawning Information Industry Co., Ltd.'s (SHSE:603019) 29% Share Price Surge Not Quite Adding Up

Dawning Information Industry Co., Ltd. (SHSE:603019) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Dawning Information Industry as a stock to potentially avoid with its 37.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Dawning Information Industry has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Dawning Information Industry

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

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Dawning Information Industry's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. The latest three year period has also seen an excellent 92% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is not materially different.

With this information, we find it interesting that Dawning Information Industry is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Dawning Information Industry's P/E?

The large bounce in Dawning Information Industry's shares has lifted the company's P/E to a fairly high level. 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 Dawning Information Industry currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Dawning Information Industry that we have uncovered.

If you're unsure about the strength of Dawning Information Industry'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.