Olympic Circuit Technology Co., Ltd's (SHSE:603920) 26% Price Boost Is Out Of Tune With Earnings

Olympic Circuit Technology Co., Ltd (SHSE:603920) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 50%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Olympic Circuit Technology's P/E ratio of 27.9x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Olympic Circuit Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. 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 not quite in favour.

Check out our latest analysis for Olympic Circuit Technology

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

How Is Olympic Circuit Technology's Growth Trending?

In order to justify its P/E ratio, Olympic Circuit Technology would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a decent 5.4% gain to the company's bottom line. Pleasingly, EPS has also lifted 100% in aggregate from three years ago, partly 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 three years should generate growth of 11% per annum as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% each year, which is noticeably more attractive.

In light of this, it's curious that Olympic Circuit Technology's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Its shares have lifted substantially and now Olympic Circuit Technology's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Olympic Circuit Technology currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Olympic Circuit Technology (including 1 which is concerning).

You might be able to find a better investment than Olympic Circuit Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.