Anacle Systems Limited's (HKG:8353) Shares Climb 43% But Its Business Is Yet to Catch Up

Anacle Systems Limited (HKG:8353) shareholders have had their patience rewarded with a 43% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 92% in the last year.

Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 8x, you may consider Anacle Systems as a stock to avoid entirely with its 57.5x 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.

Anacle Systems certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, 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.

View our latest analysis for Anacle Systems

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Anacle Systems' earnings, revenue and cash flow.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. Still, incredibly EPS has fallen 73% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 19% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Anacle Systems is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

The strong share price surge has got Anacle Systems' P/E rushing to great heights as well. 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.

We've established that Anacle Systems currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Anacle Systems is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

If these risks are making you reconsider your opinion on Anacle Systems, 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.