Optimistic Investors Push Shanghai Conant Optical Co., Ltd. (HKG:2276) Shares Up 31% But Growth Is Lacking

Shanghai Conant Optical Co., Ltd. (HKG:2276) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. The annual gain comes to 207% following the latest surge, making investors sit up and take notice.

After such a large jump in price, Shanghai Conant Optical's price-to-earnings (or "P/E") ratio of 32x 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 10x and even P/E's below 6x are quite common. 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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Recent times have been advantageous for Shanghai Conant Optical as its earnings have been rising faster 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.

See our latest analysis for Shanghai Conant Optical

Keen to find out how analysts think Shanghai Conant Optical's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Shanghai Conant Optical's Growth Trending?

In order to justify its P/E ratio, Shanghai Conant Optical would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 34% last year. The strong recent performance means it was also able to grow EPS by 51% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the three analysts following the company. That's shaping up to be similar to the 15% each year growth forecast for the broader market.

In light of this, it's curious that Shanghai Conant Optical's P/E sits above the majority of other companies. 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.

What We Can Learn From Shanghai Conant Optical's P/E?

Shanghai Conant Optical's P/E is flying high just like its stock has during the last month. 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.

Our examination of Shanghai Conant Optical's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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.

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

Of course, you might also be able to find a better stock than Shanghai Conant Optical. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.