Huizhou Desay SV Automotive Co., Ltd. (SZSE:002920) shares have continued their recent momentum with a 31% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Following the firm bounce in price, Huizhou Desay SV Automotive may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.4x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Huizhou Desay SV Automotive certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Huizhou Desay SV Automotive?

The only time you'd be truly comfortable seeing a P/E as high as Huizhou Desay SV Automotive's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. Pleasingly, EPS has also lifted 170% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 34% per annum over the next three years. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Huizhou Desay SV Automotive is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Huizhou Desay SV Automotive's P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of Huizhou Desay SV Automotive's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Huizhou Desay SV Automotive (1 is a bit unpleasant!) that you should be aware of before investing here.

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).

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.