Wuxi Taclink Optoelectronics Technology Co., Ltd.'s (SHSE:688205) 30% Jump Shows Its Popularity With Investors

Wuxi Taclink Optoelectronics Technology Co., Ltd. (SHSE:688205) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 43% in the last year.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Wuxi Taclink Optoelectronics Technology as a stock to avoid entirely with its 80x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Wuxi Taclink Optoelectronics 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. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Wuxi Taclink Optoelectronics Technology

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Does Growth Match The High P/E?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 15% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 41% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 83% as estimated by the one analyst watching the company. With the market only predicted to deliver 40%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Wuxi Taclink Optoelectronics 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 Bottom Line On Wuxi Taclink Optoelectronics Technology's P/E

Shares in Wuxi Taclink Optoelectronics Technology have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Wuxi Taclink Optoelectronics 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.

Having said that, be aware Wuxi Taclink Optoelectronics Technology is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Wuxi Taclink Optoelectronics Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.