There's Reason For Concern Over Dongguan Tarry Electronics Co.,Ltd's (SZSE:300976) Massive 26% Price Jump

Dongguan Tarry Electronics Co.,Ltd (SZSE:300976) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Dongguan Tarry ElectronicsLtd's price-to-earnings (or "P/E") ratio of 34.8x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Dongguan Tarry ElectronicsLtd has been doing quite well of late. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. 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 Dongguan Tarry ElectronicsLtd

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

Is There Some Growth For Dongguan Tarry ElectronicsLtd?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Still, incredibly EPS has fallen 38% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 30% as estimated by the sole analyst watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's curious that Dongguan Tarry ElectronicsLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Dongguan Tarry ElectronicsLtd's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Dongguan Tarry ElectronicsLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You always need to take note of risks, for example - Dongguan Tarry ElectronicsLtd has 1 warning sign we think 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.