Investors Appear Satisfied With Cubic Sensor and Instrument Co.,Ltd.'s (SHSE:688665) Prospects As Shares Rocket 28%

Cubic Sensor and Instrument Co.,Ltd. (SHSE:688665) shares have continued their recent momentum with a 28% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 24% in the last twelve months.

After such a large jump in price, Cubic Sensor and InstrumentLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.5x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x 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 as high as it is.

Cubic Sensor and InstrumentLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Cubic Sensor and InstrumentLtd

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

What Are Growth Metrics Telling Us About The High P/E?

Cubic Sensor and InstrumentLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 37% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 48% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 196% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Cubic Sensor and InstrumentLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Cubic Sensor and InstrumentLtd's P/E

Cubic Sensor and InstrumentLtd shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Cubic Sensor and InstrumentLtd 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. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Cubic Sensor and InstrumentLtd is showing 4 warning signs in our investment analysis, and 1 of those is a bit concerning.

If you're unsure about the strength of Cubic Sensor and InstrumentLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.