Suzhou TFC Optical Communication Co., Ltd.'s (SZSE:300394) 39% Jump Shows Its Popularity With Investors

Suzhou TFC Optical Communication Co., Ltd. (SZSE:300394) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.

After such a large jump in price, Suzhou TFC Optical Communication may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 48.5x, 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. 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, Suzhou TFC Optical Communication has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Suzhou TFC Optical Communication

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Suzhou TFC Optical Communication.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Suzhou TFC Optical Communication's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 145% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 270% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 41% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

In light of this, it's understandable that Suzhou TFC Optical Communication'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

Suzhou TFC Optical Communication'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.

As we suspected, our examination of Suzhou TFC Optical Communication's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Suzhou TFC Optical Communication (2 make us uncomfortable) you should be aware of.

If you're unsure about the strength of Suzhou TFC Optical Communication's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.