Huagong Tech Company Limited (SZSE:000988) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Huagong Tech Company Limited (SZSE:000988) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 61%.

Since its price has surged higher, Huagong Tech's price-to-earnings (or "P/E") ratio of 34x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Huagong Tech has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Huagong Tech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Huagong Tech.

Is There Enough Growth For Huagong Tech?

In order to justify its P/E ratio, Huagong Tech would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 45%. The latest three year period has also seen an excellent 90% overall rise in EPS, aided by its short-term performance. 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 year should generate growth of 35% as estimated by the nine analysts watching the company. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Huagong Tech's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Huagong Tech's P/E?

Huagong Tech 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 Huagong Tech's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Huagong Tech.

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.