Hangzhou Huning Elevator Parts Co., Ltd. (SZSE:300669) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.
Following the firm bounce in price, Hangzhou Huning Elevator Parts' price-to-earnings (or "P/E") ratio of 47.4x 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty. Escalator Comb Plate Impact Detection Systems
As an illustration, earnings have deteriorated at Hangzhou Huning Elevator Parts over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
View our latest analysis for Hangzhou Huning Elevator Parts
There's an inherent assumption that a company should far outperform the market for P/E ratios like Hangzhou Huning Elevator Parts' to be considered reasonable.
Retrospectively, the last year delivered a frustrating 5.4% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's alarming that Hangzhou Huning Elevator Parts' P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
Shares in Hangzhou Huning Elevator Parts have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Hangzhou Huning Elevator Parts revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
You always need to take note of risks, for example - Hangzhou Huning Elevator Parts has 1 warning sign we think you should be aware of.
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).
Find out whether Hangzhou Huning Elevator Parts is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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Hangzhou Huning Elevator Parts Co., Ltd. designs, develops, manufactures, and sells various elevator components in China and internationally.
Excellent balance sheet with acceptable track record.
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