Lens Technology Co., Ltd.'s (SZSE:300433) 27% Price Boost Is Out Of Tune With Earnings

The Lens Technology Co., Ltd. (SZSE:300433) share price has done very well over the last month, posting an excellent gain of 27%. The annual gain comes to 140% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, it's still not a stretch to say that Lens Technology's price-to-earnings (or "P/E") ratio of 36.3x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Lens Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Lens Technology

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

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Lens Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 11%. Still, lamentably EPS has fallen 23% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 32% during the coming year according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's curious that Lens Technology's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Lens Technology's P/E

Its shares have lifted substantially and now Lens Technology's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Lens Technology currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Lens Technology that you need to take into consideration.

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

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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.