There's Reason For Concern Over Sprocomm Intelligence Limited's (HKG:1401) Massive 28% Price Jump

Sprocomm Intelligence Limited (HKG:1401) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last 30 days were the cherry on top of the stock's 319% gain in the last year, which is nothing short of spectacular.

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 9x, you may consider Sprocomm Intelligence as a stock to avoid entirely with its 76.5x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Sprocomm Intelligence has been doing very well. 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 Sprocomm Intelligence

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 Sprocomm Intelligence's earnings, revenue and cash flow.

Is There Enough Growth For Sprocomm Intelligence?

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

Retrospectively, the last year delivered an exceptional 398% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 20% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Sprocomm Intelligence is trading at a P/E higher than the market. 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.

What We Can Learn From Sprocomm Intelligence's P/E?

Sprocomm Intelligence's P/E is flying high just like its stock has during the last month. 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.

We've established that Sprocomm Intelligence currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.

It is also worth noting that we have found 3 warning signs for Sprocomm Intelligence (2 are significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Sprocomm Intelligence, 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.