Despite an already strong run, AsiaInfo Technologies Limited (HKG:1675) shares have been powering on, with a gain of 47% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 48% in the last year.
Following the firm bounce in price, AsiaInfo Technologies' price-to-earnings (or "P/E") ratio of 16.3x 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 10x 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.
AsiaInfo Technologies certainly has been doing a good job lately as it's been growing earnings more 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 AsiaInfo Technologies
Is There Enough Growth For AsiaInfo Technologies?
In order to justify its P/E ratio, AsiaInfo Technologies would need to produce outstanding growth well in excess of the market.
Retrospectively, the last year delivered a decent 3.0% gain to the company's bottom line. Still, lamentably EPS has fallen 32% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Looking ahead now, EPS is anticipated to climb by 13% per annum during the coming three years according to the five analysts following the company. Meanwhile, the rest of the market is forecast to expand by 11% per annum, which is not materially different.
In light of this, it's curious that AsiaInfo Technologies' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.
The Bottom Line On AsiaInfo Technologies' P/E
The strong share price surge has got AsiaInfo Technologies' 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.
Our examination of AsiaInfo Technologies' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Having said that, be aware AsiaInfo Technologies is showing 2 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on AsiaInfo Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.