Despite an already strong run, Time Interconnect Technology Limited (HKG:1729) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 50% in the last year.
Following the firm bounce in price, Time Interconnect Technology may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 13x, since almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times have been quite advantageous for Time Interconnect Technology as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Time Interconnect Technology
Is There Enough Growth For Time Interconnect Technology?
The only time you'd be truly comfortable seeing a P/E as high as Time Interconnect Technology's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered an exceptional 91% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 70% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
It's interesting to note that the rest of the market is similarly expected to grow by 20% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
With this information, we find it interesting that Time Interconnect Technology is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Key Takeaway
Time Interconnect Technology shares have received a push in the right direction, but its P/E is elevated too. 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.
Our examination of Time Interconnect Technology revealed its three-year earnings trends aren't impacting its high P/E as much as we would have predicted, given they look similar to current market expectations. When we see average earnings with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You should always think about risks. Case in point, we've spotted 1 warning sign for Time Interconnect Technology 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).
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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.