Shenzhen JPT Opto-Electronics Co., Ltd. (SHSE:688025) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 2.4% isn't as impressive.
Since its price has surged higher, Shenzhen JPT Opto-Electronics' price-to-earnings (or "P/E") ratio of 49.1x might make it look like a strong 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen JPT Opto-Electronics has been doing quite well of late. 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.
Is There Enough Growth For Shenzhen JPT Opto-Electronics?
Shenzhen JPT Opto-Electronics' 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 strong recent performance means it was also able to grow EPS by 137% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to climb by 121% during the coming year according to the four analysts following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.
With this information, we can see why Shenzhen JPT Opto-Electronics 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 Bottom Line On Shenzhen JPT Opto-Electronics' P/E
Shenzhen JPT Opto-Electronics' P/E is flying high just like its stock has during the last month. 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.
As we suspected, our examination of Shenzhen JPT Opto-Electronics' 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. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen JPT Opto-Electronics that you should be aware of.
Of course, you might also be able to find a better stock than Shenzhen JPT Opto-Electronics. 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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