Earnings Not Telling The Story For G.Tech Technology Ltd. (SZSE:301503) After Shares Rise 27%

G.Tech Technology Ltd. (SZSE:301503) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 112% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about G.Tech Technology's P/E ratio of 36.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 35x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, G.Tech Technology's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for G.Tech Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on G.Tech Technology's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 1.8%. Regardless, EPS has managed to lift by a handy 8.3% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it interesting that G.Tech Technology is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now G.Tech Technology's P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of G.Tech Technology revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for G.Tech Technology (of which 1 is concerning!) you should know about.

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