The Precision Tsugami (China) Corporation Limited (HKG:1651) share price has done very well over the last month, posting an excellent gain of 39%. The last 30 days bring the annual gain to a very sharp 80%.
In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Precision Tsugami (China)'s P/E ratio of 9.7x, since the median price-to-earnings (or "P/E") ratio in Hong Kong is also close to 10x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
With earnings growth that's superior to most other companies of late, Precision Tsugami (China) has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
Check out our latest analysis for Precision Tsugami (China)
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Precision Tsugami (China)'s is when the company's growth is tracking the market closely.
Taking a look back first, we see that the company grew earnings per share by an impressive 21% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 3.6% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 25% each year over the next three years. With the market only predicted to deliver 13% each year, the company is positioned for a stronger earnings result.
With this information, we find it interesting that Precision Tsugami (China) is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Key Takeaway
Its shares have lifted substantially and now Precision Tsugami (China)'s P/E is also back up to the market median. 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.
We've established that Precision Tsugami (China) currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You should always think about risks. Case in point, we've spotted 2 warning signs for Precision Tsugami (China) you should be aware of, and 1 of them is significant.
You might be able to find a better investment than Precision Tsugami (China). 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.