Zhejiang Huace Film & TV Co., Ltd. (SZSE:300133) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Zhejiang Huace Film & TV as a stock to avoid entirely with its 61.6x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.
Zhejiang Huace Film & TV has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
Is There Enough Growth For Zhejiang Huace Film & TV?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Zhejiang Huace Film & TV's to be considered reasonable.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 46%. As a result, earnings from three years ago have also fallen 60% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 37% per annum during the coming three years according to the seven analysts following the company. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Zhejiang Huace Film & TV's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Bottom Line On Zhejiang Huace Film & TV's P/E
The strong share price surge has got Zhejiang Huace Film & TV's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Zhejiang Huace Film & TV's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
You should always think about risks. Case in point, we've spotted 2 warning signs for Zhejiang Huace Film & TV you should be aware of.
You might be able to find a better investment than Zhejiang Huace Film & TV. 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.
