Beijing Yuanliu Hongyuan Electronic Technology Co., Ltd. (SHSE:603267) Stocks Shoot Up 35% But Its P/E Still Looks Reasonable

Beijing Yuanliu Hongyuan Electronic Technology Co., Ltd. (SHSE:603267) shares have had a really impressive month, gaining 35% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Since its price has surged higher, Beijing Yuanliu Hongyuan Electronic Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 73.9x, since almost half of all companies in China have P/E ratios under 38x and even P/E's lower than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Beijing Yuanliu Hongyuan Electronic Technology has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Beijing Yuanliu Hongyuan Electronic Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Beijing Yuanliu Hongyuan Electronic Technology.

How Is Beijing Yuanliu Hongyuan Electronic Technology's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 60% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 81% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 115% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

In light of this, it's understandable that Beijing Yuanliu Hongyuan Electronic Technology's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Beijing Yuanliu Hongyuan Electronic Technology have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Beijing Yuanliu Hongyuan Electronic Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

You always need to take note of risks, for example - Beijing Yuanliu Hongyuan Electronic Technology has 2 warning signs we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.