Dongfang Electric Corporation Limited's (HKG:1072) 30% Jump Shows Its Popularity With Investors

The Dongfang Electric Corporation Limited (HKG:1072) share price has done very well over the last month, posting an excellent gain of 30%. The annual gain comes to 136% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Dongfang Electric may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 22.3x, since almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

While the market has experienced earnings growth lately, Dongfang Electric's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for Dongfang Electric

Want the full picture on analyst estimates for the company? Then our free report on Dongfang Electric will help you uncover what's on the horizon.

Is There Enough Growth For Dongfang Electric?

The only time you'd be truly comfortable seeing a P/E as steep as Dongfang Electric's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.1%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should generate growth of 38% as estimated by the eight analysts watching the company. With the market only predicted to deliver 20%, the company is positioned for a stronger earnings result.

With this information, we can see why Dongfang Electric is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in Dongfang Electric have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Dongfang Electric's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Dongfang Electric you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.