Gettop Acoustic Co., Ltd.'s (SZSE:002655) 27% Share Price Surge Not Quite Adding Up

Despite an already strong run, Gettop Acoustic Co., Ltd. (SZSE:002655) shares have been powering on, with a gain of 27% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 7.6% isn't as attractive.

Since its price has surged higher, Gettop Acoustic may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 62.2x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Gettop Acoustic as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Gettop Acoustic

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Gettop Acoustic's earnings, revenue and cash flow.

How Is Gettop Acoustic's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 180% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Gettop Acoustic's P/E sits above the majority of other companies. 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 Final Word

Shares in Gettop Acoustic have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Gettop Acoustic currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Gettop Acoustic with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Gettop Acoustic. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.