Earnings Tell The Story For Inspur Digital Enterprise Technology Limited (HKG:596) As Its Stock Soars 38%

The Inspur Digital Enterprise Technology Limited (HKG:596) share price has done very well over the last month, posting an excellent gain of 38%. The annual gain comes to 253% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Inspur Digital Enterprise Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 29.6x, since almost half of all companies in Hong Kong have P/E ratios under 11x and even P/E's lower than 7x are not unusual. 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 Inspur Digital Enterprise Technology 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.

Check out our latest analysis for Inspur Digital Enterprise Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Inspur Digital Enterprise Technology.

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

Inspur Digital Enterprise Technology's 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.

Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. Pleasingly, EPS has also lifted 608% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 30% each year as estimated by the four analysts watching the company. With the market only predicted to deliver 15% per year, the company is positioned for a stronger earnings result.

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.

What We Can Learn From Inspur Digital Enterprise Technology's P/E?

Shares in Inspur Digital Enterprise Technology have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Inspur Digital Enterprise Technology'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. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Inspur Digital Enterprise Technology that you should be aware of.

If these risks are making you reconsider your opinion on Inspur Digital Enterprise Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.