Earnings Not Telling The Story For Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) After Shares Rise 28%

Despite an already strong run, Shanghai Qingpu Fire-Fighting Equipment Co., Ltd. (HKG:8115) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 124% in the last year.

Since its price has surged higher, Shanghai Qingpu Fire-Fighting Equipment may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 21.6x, since almost half of all companies in Hong Kong have P/E ratios under 8x and even P/E's lower than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Shanghai Qingpu Fire-Fighting Equipment as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shanghai Qingpu Fire-Fighting Equipment

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 Shanghai Qingpu Fire-Fighting Equipment's earnings, revenue and cash flow.

Is There Enough Growth For Shanghai Qingpu Fire-Fighting Equipment?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Qingpu Fire-Fighting Equipment's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 19% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Shanghai Qingpu Fire-Fighting Equipment is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

The strong share price surge has got Shanghai Qingpu Fire-Fighting Equipment's P/E rushing to great heights as well. 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 Shanghai Qingpu Fire-Fighting Equipment revealed its three-year earnings trends aren't impacting its high P/E anywhere near 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 high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shanghai Qingpu Fire-Fighting Equipment you should know about.

If you're unsure about the strength of Shanghai Qingpu Fire-Fighting Equipment's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.