ShenZhen Click Technology Co.,LTD.'s (SZSE:002782) price-to-earnings (or "P/E") ratio of 39.8x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 35x and even P/E's below 20x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, ShenZhen Click TechnologyLTD has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
See our latest analysis for ShenZhen Click TechnologyLTD
Does Growth Match The High P/E?
ShenZhen Click TechnologyLTD'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 growth, the company posted a terrific increase of 456%. The latest three year period has also seen a 8.8% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 75% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 43%, which is noticeably less attractive.
In light of this, it's understandable that ShenZhen Click TechnologyLTD's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Bottom Line On ShenZhen Click TechnologyLTD's P/E
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 ShenZhen Click TechnologyLTD'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. Unless these conditions change, they will continue to provide strong support to the share price.
Having said that, be aware ShenZhen Click TechnologyLTD is showing 3 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on ShenZhen Click TechnologyLTD, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.