MicroPort NeuroScientific Corporation (HKG:2172) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Longer-term, the stock has been solid despite a difficult 30 days, gaining 13% in the last year.
Even after such a large drop in price, MicroPort NeuroScientific may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 20.6x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 5x 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.
With earnings growth that's superior to most other companies of late, MicroPort NeuroScientific has been doing relatively well. 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 MicroPort NeuroScientific
Is There Enough Growth For MicroPort NeuroScientific?
MicroPort NeuroScientific's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
If we review the last year of earnings growth, the company posted a terrific increase of 76%. The strong recent performance means it was also able to grow EPS by 804% 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 26% per annum over the next three years. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.
In light of this, it's understandable that MicroPort NeuroScientific'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
A significant share price dive has done very little to deflate MicroPort NeuroScientific's very lofty P/E. 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 MicroPort NeuroScientific 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.
A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for MicroPort NeuroScientific with six simple checks.
If you're unsure about the strength of MicroPort NeuroScientific's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.