Beijing Chunlizhengda Medical Instruments (HKG:1858) shares have continued recent momentum with a 39% gain in the last month alone. Zooming out, the stock's 444% gain in the last year is certainly splendiferous.

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). So some would prefer to hold off buying when there is a lot of optimism towards a stock. One way to gauge market expectations of a stock is to look at its Price to Earnings Ratio (PE Ratio). A high P/E ratio means that investors have a high expectation about future growth, while a low P/E ratio means they have low expectations about future growth.

See 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 58.48 indicates some degree of optimism towards the stock. The image below shows that Beijing Chunlizhengda Medical Instruments has a significantly higher P/E than the average (17.3) P/E for companies in the medical equipment industry.

That means that the market expects Beijing Chunlizhengda Medical Instruments will outperform other companies in its industry. 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

Generally speaking the rate of earnings growth has a profound impact on a company's P/E multiple. Earnings growth means that in the future the 'E' will be higher. That means even if the current P/E is high, it will reduce over time if the share price stays flat. Then, a lower P/E should attract more buyers, pushing the share price up.

Beijing Chunlizhengda Medical Instruments's 99% EPS improvement over the last year was like bamboo growth after rain; rapid and impressive. The sweetener is that the annual five year growth rate of 26% is also impressive. 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. That means it doesn't take debt or cash into account. 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.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

So What Does Beijing Chunlizhengda Medical Instruments's Balance Sheet Tell Us?

The extra options and safety that comes with Beijing Chunlizhengda Medical Instruments's CN¥399m net cash position means that it deserves a higher P/E than it would if it had a lot of net debt.

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

Beijing Chunlizhengda Medical Instruments's P/E is 58.5 which suggests the market is more focussed on the future opportunity rather than the current level of earnings. Its net cash position is the cherry on top of its superb EPS growth. So based on this analysis we'd expect Beijing Chunlizhengda Medical Instruments to have a high P/E ratio. What we know for sure is that investors have become much more excited about Beijing Chunlizhengda Medical Instruments recently, since they have pushed its P/E ratio from 42.2 to 58.5 over the last month. For those who prefer to invest with the flow of momentum, that might mean it's time to put the stock on a watchlist, or research it. But the contrarian may see it as a missed opportunity.

Investors have an opportunity when market expectations about a stock are wrong. As value investor Benjamin Graham famously said, 'In the short run, the market is a voting machine but in the long run, it is a weighing machine. So this free visual report on analyst forecasts could hold the key to an excellent investment decision.

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.