Why Investors Shouldn't Be Surprised By Zhuzhou Hongda Electronics Corp.,Ltd.'s (SZSE:300726) 29% Share Price Surge

Zhuzhou Hongda Electronics Corp.,Ltd. (SZSE:300726) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

Since its price has surged higher, Zhuzhou Hongda ElectronicsLtd's price-to-earnings (or "P/E") ratio of 46.3x 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 38x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Zhuzhou Hongda ElectronicsLtd 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 Zhuzhou Hongda ElectronicsLtd

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

Is There Enough Growth For Zhuzhou Hongda ElectronicsLtd?

The only time you'd be truly comfortable seeing a P/E as high as Zhuzhou Hongda ElectronicsLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. The last three years don't look nice either as the company has shrunk EPS by 57% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 125% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 37%, which is noticeably less attractive.

In light of this, it's understandable that Zhuzhou Hongda ElectronicsLtd'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

Zhuzhou Hongda ElectronicsLtd's P/E is getting right up there since its shares have risen strongly. 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 Zhuzhou Hongda ElectronicsLtd 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.

Before you settle on your opinion, we've discovered 3 warning signs for Zhuzhou Hongda ElectronicsLtd that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.