When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Zhejiang Provincial New Energy Investment Group Co., Ltd. (SHSE:600032) as a stock to potentially avoid with its 39.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Zhejiang Provincial New Energy Investment Group as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
View our latest analysis for Zhejiang Provincial New Energy Investment Group
Does Growth Match The High P/E?
Zhejiang Provincial New Energy Investment Group's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 82% as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 43%, which is noticeably less attractive.
With this information, we can see why Zhejiang Provincial New Energy Investment Group is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Zhejiang Provincial New Energy Investment Group's P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Zhejiang Provincial New Energy Investment Group maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
And what about other risks? Every company has them, and we've spotted 4 warning signs for Zhejiang Provincial New Energy Investment Group (of which 1 makes us a bit uncomfortable!) you should know about.
Of course, you might also be able to find a better stock than Zhejiang Provincial New Energy Investment Group. 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.