Optimistic Investors Push Beijing Chunlizhengda Medical Instruments Co., Ltd. (HKG:1858) Shares Up 28% But Growth Is Lacking

Beijing Chunlizhengda Medical Instruments Co., Ltd. (HKG:1858) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The annual gain comes to 127% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Beijing Chunlizhengda Medical Instruments may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 26.2x, 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. 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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Beijing Chunlizhengda Medical Instruments certainly has been doing a good job lately as it's been growing earnings more than most other companies. 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.

View our latest analysis for Beijing Chunlizhengda Medical Instruments

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What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Beijing Chunlizhengda Medical Instruments' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 63% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 24% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 0.06% over the next year. With the market predicted to deliver 20% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Beijing Chunlizhengda Medical Instruments' P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Beijing Chunlizhengda Medical Instruments have built up some good momentum lately, which has really inflated its P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Beijing Chunlizhengda Medical Instruments' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Beijing Chunlizhengda Medical Instruments with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.