Why Investors Shouldn't Be Surprised By Eoptolink Technology Inc., Ltd.'s (SZSE:300502) 39% Share Price Surge

Eoptolink Technology Inc., Ltd. (SZSE:300502) shares have had a really impressive month, gaining 39% after a shaky period beforehand. The last month tops off a massive increase of 183% in the last year.

Since its price has surged higher, Eoptolink Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 72.8x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 so lofty.

Eoptolink 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. It seems that many are expecting the company to continue defying the broader market adversity, 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 Eoptolink Technology

Keen to find out how analysts think Eoptolink Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Eoptolink Technology would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 72% last year. The strong recent performance means it was also able to grow EPS by 103% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 46% each year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why Eoptolink Technology 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 Eoptolink Technology's P/E?

Eoptolink Technology's P/E is flying high just like its stock has during the last month. 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 Eoptolink Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Eoptolink Technology.

Of course, you might also be able to find a better stock than Eoptolink 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.