Hengxin Technology Ltd.'s (HKG:1085) Shares Climb 69% But Its Business Is Yet to Catch Up

Hengxin Technology Ltd. (HKG:1085) shareholders have had their patience rewarded with a 69% share price jump in the last month. The annual gain comes to 109% following the latest surge, making investors sit up and take notice.

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 12x, you may consider Hengxin Technology as a stock to avoid entirely with its 21.1x 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.

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For example, consider that Hengxin Technology's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Hengxin Technology

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 Hengxin Technology's earnings, revenue and cash flow.

How Is Hengxin Technology's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 46% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 51% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 21% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Hengxin Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Hengxin Technology's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Hengxin Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Hengxin Technology (1 is concerning!) that you should be aware of before investing here.

You might be able to find a better investment than Hengxin Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.