Hanwei Electronics Group Corporation's (SZSE:300007) P/E Is Still On The Mark Following 46% Share Price Bounce

Hanwei Electronics Group Corporation (SZSE:300007) shareholders have had their patience rewarded with a 46% share price jump in the last month. Looking further back, the 10% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Hanwei Electronics Group may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.6x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Hanwei Electronics Group has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Hanwei Electronics Group

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

How Is Hanwei Electronics Group's Growth Trending?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 43%. As a result, earnings from three years ago have also fallen 54% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 24% per year as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

With this information, we can see why Hanwei Electronics Group 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.

What We Can Learn From Hanwei Electronics Group's P/E?

Shares in Hanwei Electronics Group have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Hanwei Electronics Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Hanwei Electronics Group is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Hanwei Electronics Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.