Why Investors Shouldn't Be Surprised By Tiangong International Company Limited's (HKG:826) 33% Share Price Surge

Despite an already strong run, Tiangong International Company Limited (HKG:826) shares have been powering on, with a gain of 33% in the last thirty days. The last 30 days bring the annual gain to a very sharp 72%.

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 12x, you may consider Tiangong International as a stock to avoid entirely with its 20.3x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

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While the market has experienced earnings growth lately, Tiangong International's earnings have gone into reverse gear, which is not great. 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.

See our latest analysis for Tiangong International

Want the full picture on analyst estimates for the company? Then our free report on Tiangong International will help you uncover what's on the horizon.

Is There Enough Growth For Tiangong International?

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

Retrospectively, the last year delivered a frustrating 1.8% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 46% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 38% as estimated by the sole analyst watching the company. With the market only predicted to deliver 21%, the company is positioned for a stronger earnings result.

With this information, we can see why Tiangong International is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

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

As we suspected, our examination of Tiangong International'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tiangong International you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.