The Zhejiang Huace Film & TV Co., Ltd. (SZSE:300133) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 18% in that time.
Even after such a large drop in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may still consider Zhejiang Huace Film & TV as a stock to potentially avoid with its 44.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Zhejiang Huace Film & TV hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. 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.
How Is Zhejiang Huace Film & TV's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as Zhejiang Huace Film & TV's is when the company's growth is on track to outshine the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. This means it has also seen a slide in earnings over the longer-term as EPS is down 43% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Turning to the outlook, the next three years should generate growth of 30% per annum as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 25% per year growth forecast for the broader market.
With this information, we can see why Zhejiang Huace Film & TV 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 Huace Film & TV's P/E
Despite the recent share price weakness, Zhejiang Huace Film & TV's P/E remains higher than most other companies. 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 Zhejiang Huace Film & TV's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.
You need to take note of risks, for example - Zhejiang Huace Film & TV has 2 warning signs (and 1 which is concerning) we think you should know about.
If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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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.