Earnings Not Telling The Story For Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) After Shares Rise 27%

Zhuzhou CRRC Times Electric Co., Ltd. (HKG:3898) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 33%.

Following the firm bounce in price, given around half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Zhuzhou CRRC Times Electric as a stock to potentially avoid with its 12.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Zhuzhou CRRC Times Electric certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhuzhou CRRC Times Electric

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Zhuzhou CRRC Times Electric.

How Is Zhuzhou CRRC Times Electric's Growth Trending?

In order to justify its P/E ratio, Zhuzhou CRRC Times Electric would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. EPS has also lifted 16% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per year over the next three years. That's shaping up to be similar to the 12% per year growth forecast for the broader market.

With this information, we find it interesting that Zhuzhou CRRC Times Electric is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Zhuzhou CRRC Times Electric's P/E?

The large bounce in Zhuzhou CRRC Times Electric's shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Zhuzhou CRRC Times Electric's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

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

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.