Why Investors Shouldn't Be Surprised By Lingyi iTech (Guangdong) Company's (SZSE:002600) 40% Share Price Surge

Lingyi iTech (Guangdong) Company (SZSE:002600) shares have had a really impressive month, gaining 40% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 53%.

Following the firm bounce in price, Lingyi iTech (Guangdong) may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.4x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Lingyi iTech (Guangdong) has been very sluggish. 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.

View our latest analysis for Lingyi iTech (Guangdong)

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Lingyi iTech (Guangdong) would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 30% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 45% per year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 18% per annum growth forecast for the broader market.

With this information, we can see why Lingyi iTech (Guangdong) is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Lingyi iTech (Guangdong)'s P/E

Lingyi iTech (Guangdong) 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.

As we suspected, our examination of Lingyi iTech (Guangdong)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

It is also worth noting that we have found 2 warning signs for Lingyi iTech (Guangdong) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.