There's Reason For Concern Over Yangtze Optical Fibre And Cable Joint Stock Limited Company's (HKG:6869) Massive 25% Price Jump

Despite an already strong run, Yangtze Optical Fibre And Cable Joint Stock Limited Company (HKG:6869) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 86% in the last year.

Although its price has surged higher, there still wouldn't be many who think Yangtze Optical Fibre And Cable Limited's price-to-earnings (or "P/E") ratio of 10.1x is worth a mention when the median P/E in Hong Kong is similar at about 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Yangtze Optical Fibre And Cable Limited hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to strengthen positively, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Yangtze Optical Fibre And Cable Limited

Want the full picture on analyst estimates for the company? Then our free report on Yangtze Optical Fibre And Cable Limited will help you uncover what's on the horizon.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Yangtze Optical Fibre And Cable Limited's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's bottom line. Even so, admirably EPS has lifted 41% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings growth is heading into negative territory, declining 15% over the next year. With the market predicted to deliver 22% growth , that's a disappointing outcome.

With this information, we find it concerning that Yangtze Optical Fibre And Cable Limited is trading at a fairly similar P/E to the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh on the share price eventually.

The Final Word

Its shares have lifted substantially and now Yangtze Optical Fibre And Cable Limited's P/E is also back up to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Yangtze Optical Fibre And Cable Limited's analyst forecasts revealed that its outlook for shrinking earnings isn't impacting its P/E as much as we would have predicted. When we see a poor outlook with earnings heading backwards, we suspect share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Yangtze Optical Fibre And Cable Limited is showing 1 warning sign in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Yangtze Optical Fibre And Cable Limited. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.