With a price-to-earnings (or "P/E") ratio of 21.1x Zhejiang Chang'an Renheng Technology Co., Ltd. (HKG:8139) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 9x and even P/E's lower than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Zhejiang Chang'an Renheng Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. 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 Zhejiang Chang'an Renheng Technology
Is There Enough Growth For Zhejiang Chang'an Renheng Technology?
The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang Chang'an Renheng Technology's is when the company's growth is on track to outshine the market decidedly.
Retrospectively, the last year delivered an exceptional 62% gain to the company's bottom line. Pleasingly, EPS has also lifted 96% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 21% shows it's noticeably more attractive on an annualised basis.
In light of this, it's understandable that Zhejiang Chang'an Renheng Technology's P/E sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.
The Final Word
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 Zhejiang Chang'an Renheng Technology maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 3 warning signs for Zhejiang Chang'an Renheng Technology you should be aware of, and 2 of them are significant.
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.
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