Huitongda Network Co., Ltd. (HKG:9878) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 36% in the last twelve months.
After such a large jump in price, Huitongda Network may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 28.3x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 6x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Huitongda Network 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 Huitongda Network
Does Growth Match The High P/E?
In order to justify its P/E ratio, Huitongda Network would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a frustrating 26% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. 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 32% each year during the coming three years according to the four analysts following the company. With the market only predicted to deliver 13% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Huitongda Network's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
The strong share price surge has got Huitongda Network'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.
We've established that Huitongda Network maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
Plus, you should also learn about this 1 warning sign we've spotted with Huitongda Network.
If these risks are making you reconsider your opinion on Huitongda Network, explore our interactive list of high quality stocks to get an idea of what else is out there.
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