Despite an already strong run, Hexing Electrical Co.,Ltd. (SHSE:603556) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 111% in the last year.

Although its price has surged higher, there still wouldn't be many who think Hexing ElectricalLtd's price-to-earnings (or "P/E") ratio of 27.8x is worth a mention when the median P/E in China is similar at about 28x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been advantageous for Hexing ElectricalLtd as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Hexing ElectricalLtd'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 43% last year. Pleasingly, EPS has also lifted 67% in aggregate from three years ago, thanks to the last 12 months of growth. 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 27% each year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% per year, which is noticeably less attractive.

With this information, we find it interesting that Hexing ElectricalLtd is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Hexing ElectricalLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Hexing ElectricalLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Hexing ElectricalLtd that you should be aware of.

If these risks are making you reconsider your opinion on Hexing ElectricalLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.