China Southern Power Grid Technology Co.,Ltd (SHSE:688248) shares have had a really impressive month, gaining 43% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 38% in the last twelve months.
Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider China Southern Power Grid TechnologyLtd as a stock to avoid entirely with its 62.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
China Southern Power Grid TechnologyLtd 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. It seems that many are expecting the company to continue defying the broader market adversity, 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.
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Does Growth Match The High P/E?
China Southern Power Grid TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered an exceptional 39% gain to the company's bottom line. The latest three year period has also seen an excellent 92% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 125% during the coming year according to the six analysts following the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.
In light of this, it's understandable that China Southern Power Grid TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On China Southern Power Grid TechnologyLtd's P/E
The strong share price surge has got China Southern Power Grid TechnologyLtd's P/E rushing to great heights as well. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of China Southern Power Grid TechnologyLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for China Southern Power Grid TechnologyLtd that you should be aware of.
If you're unsure about the strength of China Southern Power Grid TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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