To the annoyance of some shareholders, Shanghai @hub Co.,Ltd. (SHSE:603881) shares are down a considerable 27% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 38% share price drop.
In spite of the heavy fall in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may still consider Shanghai @hubLtd as a stock to avoid entirely with its 44.6x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Shanghai @hubLtd as its earnings have risen in spite of the market's earnings going into reverse. 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.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai @hubLtd.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai @hubLtd's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 58% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.
Turning to the outlook, the next three years should generate growth of 55% per year as estimated by the eight analysts watching the company. That's shaping up to be materially higher than the 22% per year growth forecast for the broader market.
With this information, we can see why Shanghai @hubLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
Shanghai @hubLtd's shares may have retreated, but its P/E is still flying high. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of Shanghai @hubLtd'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.
Plus, you should also learn about these 2 warning signs we've spotted with Shanghai @hubLtd (including 1 which makes us a bit uncomfortable).
If you're unsure about the strength of Shanghai @hubLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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