Hangzhou Zhengqiang Corporation Limited's (SZSE:301119) 29% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Hangzhou Zhengqiang Corporation Limited (SZSE:301119) shares have been powering on, with a gain of 29% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 9.8% isn't as attractive.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Hangzhou Zhengqiang's P/E ratio of 34.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 36x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For example, consider that Hangzhou Zhengqiang's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Hangzhou Zhengqiang

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Zhengqiang's earnings, revenue and cash flow.

How Is Hangzhou Zhengqiang's Growth Trending?

The only time you'd be comfortable seeing a P/E like Hangzhou Zhengqiang's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 27% in total. 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.

In light of this, it's curious that Hangzhou Zhengqiang's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Hangzhou Zhengqiang's P/E is also back up to the market median. 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.

Our examination of Hangzhou Zhengqiang 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. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Hangzhou Zhengqiang with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Hangzhou Zhengqiang. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.