Earnings Not Telling The Story For Shenzhen Pacific Union Precision Manufacturing Co., Ltd. (SHSE:688210) After Shares Rise 26%

Shenzhen Pacific Union Precision Manufacturing Co., Ltd. (SHSE:688210) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Since its price has surged higher, Shenzhen Pacific Union Precision Manufacturing may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43.1x, 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Shenzhen Pacific Union Precision Manufacturing as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shenzhen Pacific Union Precision Manufacturing

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Is There Enough Growth For Shenzhen Pacific Union Precision Manufacturing?

In order to justify its P/E ratio, Shenzhen Pacific Union Precision Manufacturing would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 65% gain to the company's bottom line. EPS has also lifted 8.5% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shenzhen Pacific Union Precision Manufacturing is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shenzhen Pacific Union Precision Manufacturing shares have received a push in the right direction, but its P/E is elevated too. 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.

Our examination of Shenzhen Pacific Union Precision Manufacturing revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Shenzhen Pacific Union Precision Manufacturing that we have uncovered.

Of course, you might also be able to find a better stock than Shenzhen Pacific Union Precision Manufacturing. 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.