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華爾街日報Dongfang Electric Corporation Limited's (HKG:1072) P/E Is Still On The Mark Following 26% Share Price Bounce
Dongfang Electric Corporation Limited (HKG:1072) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 179% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, Dongfang Electric's price-to-earnings (or "P/E") ratio of 24.6x 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 12x and even P/E's below 6x 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.
Dongfang Electric hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Dongfang Electric
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as steep as Dongfang Electric's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.1%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.
Looking ahead now, EPS is anticipated to climb by 37% during the coming year according to the seven analysts following the company. With the market only predicted to deliver 21%, the company is positioned for a stronger earnings result.
With this information, we can see why Dongfang Electric 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 Final Word
The strong share price surge has got Dongfang Electric's P/E rushing to great heights as well. 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 Dongfang Electric's 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.
You should always think about risks. Case in point, we've spotted 1 warning sign for Dongfang Electric you should be aware of.
You might be able to find a better investment than Dongfang Electric. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.