Zhejiang Taotao Vehicles Co., Ltd.'s (SZSE:301345) 27% Price Boost Is Out Of Tune With Earnings

Zhejiang Taotao Vehicles Co., Ltd. (SZSE:301345) shareholders have had their patience rewarded with a 27% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 57% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Zhejiang Taotao Vehicles' P/E ratio of 27.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 29x. 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.

Recent times have been advantageous for Zhejiang Taotao Vehicles as its earnings have been rising faster than most other companies. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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.

View our latest analysis for Zhejiang Taotao Vehicles

Keen to find out how analysts think Zhejiang Taotao Vehicles' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Zhejiang Taotao Vehicles' Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Zhejiang Taotao Vehicles' to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.4% last year. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Looking ahead now, EPS is anticipated to climb by 26% during the coming year according to the only analyst following the company. That's shaping up to be materially lower than the 35% growth forecast for the broader market.

In light of this, it's curious that Zhejiang Taotao Vehicles' P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Zhejiang Taotao Vehicles' P/E

Its shares have lifted substantially and now Zhejiang Taotao Vehicles' P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Taotao Vehicles currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Zhejiang Taotao Vehicles you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.