Zhejiang Wanfeng Auto Wheel Co., Ltd.'s (SZSE:002085) 27% Share Price Surge Not Quite Adding Up

Zhejiang Wanfeng Auto Wheel Co., Ltd. (SZSE:002085) shares have continued their recent momentum with a 27% gain in the last month alone. The annual gain comes to 206% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Zhejiang Wanfeng Auto Wheel's price-to-earnings (or "P/E") ratio of 52.1x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x and even P/E's below 20x are quite common. 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.

For example, consider that Zhejiang Wanfeng Auto Wheel's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Zhejiang Wanfeng Auto Wheel

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Wanfeng Auto Wheel will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Zhejiang Wanfeng Auto Wheel would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. Regardless, EPS has managed to lift by a handy 22% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Zhejiang Wanfeng Auto Wheel is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Zhejiang Wanfeng Auto Wheel's P/E?

Shares in Zhejiang Wanfeng Auto Wheel have built up some good momentum lately, which has really inflated its P/E. 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.

We've established that Zhejiang Wanfeng Auto Wheel currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Zhejiang Wanfeng Auto Wheel (2 don't sit too well with us!) that you should be aware of.

If you're unsure about the strength of Zhejiang Wanfeng Auto Wheel'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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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.