Shandong Hi-Speed New Energy Group Limited's (HKG:1250) 28% Share Price Surge Not Quite Adding Up

Shandong Hi-Speed New Energy Group Limited (HKG:1250) shareholders have had their patience rewarded with a 28% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 27%.

After such a large jump in price, Shandong Hi-Speed New Energy Group may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.5x, 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

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While the market has experienced earnings growth lately, Shandong Hi-Speed New Energy Group's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Shandong Hi-Speed New Energy Group

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shandong Hi-Speed New Energy Group.

Is There Enough Growth For Shandong Hi-Speed New Energy Group?

The only time you'd be truly comfortable seeing a P/E as high as Shandong Hi-Speed New Energy Group's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 99% as estimated by the one analyst watching the company. That's not great when the rest of the market is expected to grow by 19%.

In light of this, it's alarming that Shandong Hi-Speed New Energy Group's P/E sits above the majority of other companies. 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. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.

The Final Word

The large bounce in Shandong Hi-Speed New Energy Group's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Shandong Hi-Speed New Energy Group currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. When we see a poor outlook with earnings heading backwards, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Shandong Hi-Speed New Energy Group.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.