Earnings Not Telling The Story For Hefei Gocom Information Technology Co.,Ltd. (SHSE:688367) After Shares Rise 38%

The Hefei Gocom Information Technology Co.,Ltd. (SHSE:688367) share price has done very well over the last month, posting an excellent gain of 38%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.9% over the last year.

Following the firm bounce in price, Hefei Gocom Information TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 59.2x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Hefei Gocom Information TechnologyLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Hefei Gocom Information TechnologyLtd

Although there are no analyst estimates available for Hefei Gocom Information TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Hefei Gocom Information TechnologyLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Hefei Gocom Information TechnologyLtd's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. This means it has also seen a slide in earnings over the longer-term as EPS is down 67% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Hefei Gocom Information TechnologyLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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

The strong share price surge has got Hefei Gocom Information TechnologyLtd's P/E rushing to great heights as well. 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 Hefei Gocom Information TechnologyLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you take the next step, you should know about the 3 warning signs for Hefei Gocom Information TechnologyLtd (1 doesn't sit too well with us!) that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.