Earnings Tell The Story For Inspur Digital Enterprise Technology Limited (HKG:596)

When close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Inspur Digital Enterprise Technology Limited (HKG:596) as a stock to avoid entirely with its 15.7x 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.

Inspur Digital Enterprise Technology certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Inspur Digital Enterprise Technology

Want the full picture on analyst estimates for the company? Then our free report on Inspur Digital Enterprise Technology will help you uncover what's on the horizon.

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

In order to justify its P/E ratio, Inspur Digital Enterprise Technology would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 113% gain to the company's bottom line. Pleasingly, EPS has also lifted 276% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 47% per annum during the coming three years according to the sole analyst following the company. That's shaping up to be materially higher than the 15% per annum growth forecast for the broader market.

With this information, we can see why Inspur Digital Enterprise Technology 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 Bottom Line On Inspur Digital Enterprise Technology's 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 Inspur Digital Enterprise Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Inspur Digital Enterprise Technology (of which 1 is potentially serious!) 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.