Inspur Digital Enterprise Technology Limited (HKG:596) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 60% share price decline over the last year.
After such a large jump in price, Inspur Digital Enterprise Technology's price-to-earnings (or "P/E") ratio of 17.5x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 8x and even P/E's below 4x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Inspur Digital Enterprise Technology 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
SEHK:596 Price to Earnings Ratio vs Industry February 22nd 2024
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How Is Inspur Digital Enterprise Technology's Growth Trending?
In order to justify its P/E ratio, Inspur Digital Enterprise Technology would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 113%. The latest three year period has also seen an excellent 276% 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 47% per annum during the coming three years according to the one analyst following the company. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.
With this information, we can see why Inspur Digital Enterprise Technology 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 Key Takeaway
Shares in Inspur Digital Enterprise Technology have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Inspur Digital Enterprise Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
We don't want to rain on the parade too much, but we did also find 2 warning signs for Inspur Digital Enterprise Technology (1 is concerning!) that you need to be mindful of.
Of course, you might also be able to find a better stock than Inspur Digital Enterprise Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.