Leyard Optoelectronic Co., Ltd.'s (SZSE:300296) 26% Jump Shows Its Popularity With Investors

Those holding Leyard Optoelectronic Co., Ltd. (SZSE:300296) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Following the firm bounce in price, Leyard Optoelectronic's price-to-earnings (or "P/E") ratio of 44.2x 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 30x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for Leyard Optoelectronic as its earnings have been falling quicker 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.

View our latest analysis for Leyard Optoelectronic

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

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

Retrospectively, the last year delivered a frustrating 40% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 43% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 175% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's understandable that Leyard Optoelectronic's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Leyard Optoelectronic's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Leyard Optoelectronic 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. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Leyard Optoelectronic you should know about.

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

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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.