Inspur Digital Enterprise Technology Limited (HKG:596) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 125% following the latest surge, making investors sit up and take notice.
Since its price has surged higher, given close to half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") below 9x, you may consider Inspur Digital Enterprise Technology as a stock to avoid entirely with its 18.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been advantageous for Inspur Digital Enterprise Technology as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.
View our latest analysis for Inspur Digital Enterprise Technology
Is There Enough Growth For Inspur Digital Enterprise Technology?
The only time you'd be truly comfortable seeing a P/E as steep as Inspur Digital Enterprise Technology's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 84% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Looking ahead now, EPS is anticipated to climb by 39% per annum during the coming three years according to the two analysts following the company. That's shaping up to be materially higher than the 13% per year growth forecast for the broader market.
With this information, we can see why Inspur Digital Enterprise Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Inspur Digital Enterprise Technology's P/E
Shares in Inspur Digital Enterprise Technology have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
As we suspected, our examination of Inspur Digital Enterprise Technology'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.
Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Inspur Digital Enterprise Technology with six simple checks.
You might be able to find a better investment than Inspur Digital Enterprise Technology. 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.