To the annoyance of some shareholders, Zhejiang Talent Television and Film Co., Ltd. (SZSE:300426) shares are down a considerable 36% in the last month, which continues a horrid run for the company. Longer-term shareholders would now have taken a real hit with the stock declining 6.4% in the last year.
Although its price has dipped substantially, there still wouldn't be many who think Zhejiang Talent Television and Film's price-to-earnings (or "P/E") ratio of 25.2x is worth a mention when the median P/E in China is similar at about 27x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
Zhejiang Talent Television and Film certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.
What Are Growth Metrics Telling Us About The P/E?
There's an inherent assumption that a company should be matching the market for P/E ratios like Zhejiang Talent Television and Film's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 91% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it interesting that Zhejiang Talent Television and Film is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Key Takeaway
Following Zhejiang Talent Television and Film's share price tumble, its P/E is now hanging on to the median market P/E. 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.
Our examination of Zhejiang Talent Television and Film revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
Plus, you should also learn about these 2 warning signs we've spotted with Zhejiang Talent Television and Film (including 1 which is a bit concerning).
You might be able to find a better investment than Zhejiang Talent Television and Film. 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).
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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.