What Guanze Medical Information Industry (Holding) Co., Ltd.'s (HKG:2427) 62% Share Price Gain Is Not Telling You

Despite an already strong run, Guanze Medical Information Industry (Holding) Co., Ltd. (HKG:2427) shares have been powering on, with a gain of 62% in the last thirty days. The last 30 days bring the annual gain to a very sharp 48%.

After such a large jump in price, Guanze Medical Information Industry (Holding)'s price-to-earnings (or "P/E") ratio of 32.3x 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 12x and even P/E's below 7x are quite common. 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.

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With earnings growth that's exceedingly strong of late, Guanze Medical Information Industry (Holding) has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Guanze Medical Information Industry (Holding)

How Is Guanze Medical Information Industry (Holding)'s Growth Trending?

Guanze Medical Information Industry (Holding)'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.

Retrospectively, the last year delivered an exceptional 83% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 39% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 20% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Guanze Medical Information Industry (Holding) is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Guanze Medical Information Industry (Holding)'s P/E?

The strong share price surge has got Guanze Medical Information Industry (Holding)'s P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Guanze Medical Information Industry (Holding) revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Guanze Medical Information Industry (Holding) (2 are concerning) you should be aware of.

Of course, you might also be able to find a better stock than Guanze Medical Information Industry (Holding). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.