It's really great to see that even after a strong run, Beijing Chunlizhengda Medical Instruments (HKG:1858) shares have been powering on, with a gain of 33% in the last thirty days. The 480% gain over the last year is certainly lovely to see, just like a wink and smile from your sweetheart.

All else being equal, a sharp share price increase should make a stock less attractive to potential investors. In the long term, share prices tend to follow earnings per share, but in the short term prices bounce around in response to short term factors (which are not always obvious). The implication here is that deep value investors might steer clear when expectations of a company are too high. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). Investors have optimistic expectations of companies with higher P/E ratios, compared to companies with lower P/E ratios.

View our latest analysis for Beijing Chunlizhengda Medical Instruments

Does Beijing Chunlizhengda Medical Instruments Have A Relatively High Or Low P/E For Its Industry?

Beijing Chunlizhengda Medical Instruments's P/E of 54.20 indicates some degree of optimism towards the stock. The image below shows that Beijing Chunlizhengda Medical Instruments has a higher P/E than the average (39.3) P/E for companies in the medical equipment industry.

Its relatively high P/E ratio indicates that Beijing Chunlizhengda Medical Instruments shareholders think it will perform better than other companies in its industry classification. The market is optimistic about the future, but that doesn't guarantee future growth. So further research is always essential. I often monitor director buying and selling.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. Earnings growth means that in the future the 'E' will be higher. That means unless the share price increases, the P/E will reduce in a few years. And as that P/E ratio drops, the company will look cheap, unless its share price increases.

Beijing Chunlizhengda Medical Instruments's 125% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The cherry on top is that the five year growth rate was an impressive 36% per year. So I'd be surprised if the P/E ratio was not above average.

Don't Forget: The P/E Does Not Account For Debt or Bank Deposits

It's important to note that the P/E ratio considers the market capitalization, not the enterprise value. So it won't reflect the advantage of cash, or disadvantage of debt. The exact same company would hypothetically deserve a higher P/E ratio if it had a strong balance sheet, than if it had a weak one with lots of debt, because a cashed up company can spend on growth.

Such expenditure might be good or bad, in the long term, but the point here is that the balance sheet is not reflected by this ratio.

Is Debt Impacting Beijing Chunlizhengda Medical Instruments's P/E?

Since Beijing Chunlizhengda Medical Instruments holds net cash of CN¥468m, it can spend on growth, justifying a higher P/E ratio than otherwise.

The Bottom Line On Beijing Chunlizhengda Medical Instruments's P/E Ratio

With a P/E ratio of 54.2, Beijing Chunlizhengda Medical Instruments is expected to grow earnings very strongly in the years to come. The excess cash it carries is the gravy on top its fast EPS growth. To us, this is the sort of company that we would expect to carry an above average price tag (relative to earnings). What is very clear is that the market has become significantly more optimistic about Beijing Chunlizhengda Medical Instruments over the last month, with the P/E ratio rising from 40.7 back then to 54.2 today. If you like to buy stocks that have recently impressed the market, then this one might be a candidate; but if you prefer to invest when there is 'blood in the streets', then you may feel the opportunity has passed.

Investors should be looking to buy stocks that the market is wrong about. People often underestimate remarkable growth -- so investors can make money when fast growth is not fully appreciated. So this free visualization of the analyst consensus on future earnings could help you make the right decision about whether to buy, sell, or hold.

You might be able to find a better buy than Beijing Chunlizhengda Medical Instruments. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.