Sunny Optical Technology (Group) Company Limited (HKG:2382) shareholders won't be pleased to see that the share price has had a very rough month, dropping 38% and undoing the prior period's positive performance. Still, a bad month hasn't completely ruined the past year with the stock gaining 44%, which is great even in a bull market.
In spite of the heavy fall in price, Sunny Optical Technology (Group)'s price-to-earnings (or "P/E") ratio of 21.1x might still 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. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's superior to most other companies of late, Sunny Optical Technology (Group) has been doing relatively well. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
View our latest analysis for Sunny Optical Technology (Group)
Is There Enough Growth For Sunny Optical Technology (Group)?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Sunny Optical Technology (Group)'s to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 146% last year. Still, incredibly EPS has fallen 46% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 21% per year over the next three years. That's shaping up to be materially higher than the 14% each year growth forecast for the broader market.
In light of this, it's understandable that Sunny Optical Technology (Group)'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 Final Word
Sunny Optical Technology (Group)'s shares may have retreated, but its P/E is still flying high. 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.
As we suspected, our examination of Sunny Optical Technology (Group)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.
A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Sunny Optical Technology (Group) with six simple checks on some of these key factors.
If these risks are making you reconsider your opinion on Sunny Optical Technology (Group), 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.