Despite an already strong run, Inspur Digital Enterprise Technology Limited (HKG:596) shares have been powering on, with a gain of 41% in the last thirty days. The annual gain comes to 116% following the latest surge, making investors sit up and take notice.
After such a large jump in price, Inspur Digital Enterprise Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 20x, since almost half of all companies in Hong Kong have P/E ratios under 11x and even P/E's lower than 6x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Inspur Digital Enterprise Technology certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for Inspur Digital Enterprise Technology
How Is Inspur Digital Enterprise Technology's Growth Trending?
In order to justify its P/E ratio, Inspur Digital Enterprise Technology would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings growth, the company posted a terrific increase of 91%. The strong recent performance means it was also able to grow EPS by 614% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 28% over the next year. That's shaping up to be materially higher than the 18% 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. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
We've established that Inspur Digital Enterprise Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
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.
If these risks are making you reconsider your opinion on Inspur Digital Enterprise Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.
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