The Huada Automotive Technology Corp.,Ltd (SHSE:603358) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it’s encouraging to see the stock is up 41% in the last year.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or “P/E’s”) below 29x, you may consider Huada Automotive TechnologyLtd as a stock to potentially avoid with its 43x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it’s justified.

Huada Automotive TechnologyLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.

View our latest analysis for Huada Automotive TechnologyLtd

Keen to find out how analysts think Huada Automotive TechnologyLtd’s future stacks up against the industry? In that case, our free report is a great place to start.

How Is Huada Automotive TechnologyLtd’s Growth Trending?

Huada Automotive TechnologyLtd’s P/E ratio would be typical for a company that’s expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company’s earnings per share growth last year wasn’t something to get excited about as it posted a disappointing decline of 23%. Still, the latest three year period has seen an excellent 68% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 67% as estimated by the one analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 34%, which is noticeably less attractive.

With this information, we can see why Huada Automotive TechnologyLtd is trading at such a high P/E compared to the market. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Huada Automotive TechnologyLtd’s P/E

Huada Automotive TechnologyLtd’s P/E is getting right up there since its shares have risen strongly. 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 Huada Automotive TechnologyLtd’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. It’s hard to see the share price falling strongly in the near future under these circumstances.

It’s always necessary to consider the ever-present spectre of investment risk. We’ve identified 2 warning signs with Huada Automotive TechnologyLtd, and understanding these should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.