Despite an already strong run, Dongguan Tarry Electronics Co.,Ltd (SZSE:300976) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 53% in the last year.
Although its price has surged higher, you could still be forgiven for feeling indifferent about Dongguan Tarry ElectronicsLtd's P/E ratio of 34.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 37x. 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.
Dongguan Tarry ElectronicsLtd 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 might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Dongguan Tarry ElectronicsLtd's is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 51% last year. Still, incredibly EPS has fallen 38% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 30% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.
In light of this, it's curious that Dongguan Tarry ElectronicsLtd's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
The Final Word
Its shares have lifted substantially and now Dongguan Tarry ElectronicsLtd's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Dongguan Tarry ElectronicsLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Dongguan Tarry ElectronicsLtd, and understanding should be part of your investment process.
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.
