Why Investors Shouldn't Be Surprised By LifeTech Scientific Corporation's (HKG:1302) 29% Share Price Surge

LifeTech Scientific Corporation (HKG:1302) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 36%.

Following the firm bounce in price, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 11x, you may consider LifeTech Scientific as a stock to avoid entirely with its 38.9x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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LifeTech Scientific hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for LifeTech Scientific

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

Is There Enough Growth For LifeTech Scientific?

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

Retrospectively, the last year delivered a frustrating 16% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 29% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 77% over the next year. With the market only predicted to deliver 19%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that LifeTech Scientific's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From LifeTech Scientific's P/E?

The strong share price surge has got LifeTech Scientific's P/E rushing to great heights as well. 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.

As we suspected, our examination of LifeTech Scientific'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.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for LifeTech Scientific with six simple checks.

If these risks are making you reconsider your opinion on LifeTech Scientific, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.