Shanghai INT Medical Instruments Co., Ltd.'s (HKG:1501) Share Price Not Quite Adding Up

Shanghai INT Medical Instruments Co., Ltd.'s (HKG:1501) price-to-earnings (or "P/E") ratio of 24.9x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

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With earnings growth that's superior to most other companies of late, Shanghai INT Medical Instruments has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shanghai INT Medical Instruments

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai INT Medical Instruments.

Is There Enough Growth For Shanghai INT Medical Instruments?

Shanghai INT Medical Instruments' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. As a result, it also grew EPS by 19% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 13% each year over the next three years. With the market predicted to deliver 15% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Shanghai INT Medical Instruments 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. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Shanghai INT Medical Instruments' P/E

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Shanghai INT Medical Instruments currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Shanghai INT Medical Instruments with six simple checks on some of these key factors.

If you're unsure about the strength of Shanghai INT Medical Instruments' 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.