Henan Pinggao Electric Co.,Ltd. (SHSE:600312) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 46% in the last year.
After such a large jump in price, Henan Pinggao ElectricLtd's price-to-earnings (or "P/E") ratio of 33.7x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Henan Pinggao ElectricLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Is Henan Pinggao ElectricLtd's Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Henan Pinggao ElectricLtd's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 305% gain to the company's bottom line. Pleasingly, EPS has also lifted 159% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Turning to the outlook, the next year should generate growth of 59% as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.
With this information, we can see why Henan Pinggao ElectricLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On Henan Pinggao ElectricLtd's P/E
Henan Pinggao ElectricLtd's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Henan Pinggao ElectricLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Henan Pinggao ElectricLtd with six simple checks will allow you to discover any risks that could be an issue.
If these risks are making you reconsider your opinion on Henan Pinggao ElectricLtd, 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.
