Despite an already strong run, ADD Industry (Zhejiang) CO., LTD (SHSE:603089) shares have been powering on, with a gain of 31% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 31% in the last year.
Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider ADD Industry (Zhejiang) as a stock to potentially avoid with its 50.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
As an illustration, earnings have deteriorated at ADD Industry (Zhejiang) over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for ADD Industry (Zhejiang)
What Are Growth Metrics Telling Us About The High P/E?
ADD Industry (Zhejiang)'s P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 31%. Still, the latest three year period has seen an excellent 48% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.
This is in contrast to the rest of the market, which is expected to grow by 48% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it concerning that ADD Industry (Zhejiang) is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.
The Bottom Line On ADD Industry (Zhejiang)'s P/E
ADD Industry (Zhejiang)'s P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that ADD Industry (Zhejiang) currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Don't forget that there may be other risks. For instance, we've identified 3 warning signs for ADD Industry (Zhejiang) (1 can't be ignored) you should be aware of.
You might be able to find a better investment than ADD Industry (Zhejiang). If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
