When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider ShenZhen Click Technology Co.,LTD. (SZSE:002782) as a stock to potentially avoid with its 40.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been advantageous for ShenZhen Click TechnologyLTD as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Growth For ShenZhen Click TechnologyLTD?

In order to justify its P/E ratio, ShenZhen Click TechnologyLTD would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 10.0%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 23% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 59% per year during the coming three years according to the only analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 24% per year, 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 Final Word

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.

We've established that ShenZhen Click TechnologyLTD maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It is also worth noting that we have found 2 warning signs for ShenZhen Click TechnologyLTD that you need to take into consideration.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com