KEBODA TECHNOLOGY Co., Ltd. (SHSE:603786) shareholders have had their patience rewarded with a 25% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 39%.
After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider KEBODA TECHNOLOGY as a stock to potentially avoid with its 43.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, KEBODA TECHNOLOGY has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like KEBODA TECHNOLOGY's to be considered reasonable.
Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. EPS has also lifted 29% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 24% per year over the next three years. That's shaping up to be similar to the 26% each year growth forecast for the broader market.
With this information, we find it interesting that KEBODA TECHNOLOGY is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
What We Can Learn From KEBODA TECHNOLOGY's P/E?
KEBODA TECHNOLOGY's P/E is getting right up there since its shares have risen strongly. 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.
We've established that KEBODA TECHNOLOGY currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You should always think about risks. Case in point, we've spotted 1 warning sign for KEBODA TECHNOLOGY you should be aware of.
Of course, you might also be able to find a better stock than KEBODA 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.