ZHEJIANG DIBAY ELECTRIC CO.,Ltd. (SHSE:603320) Stock Rockets 25% As Investors Are Less Pessimistic Than Expected

ZHEJIANG DIBAY ELECTRIC CO.,Ltd. (SHSE:603320) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 52%.

Although its price has surged higher, it's still not a stretch to say that ZHEJIANG DIBAY ELECTRICLtd's price-to-earnings (or "P/E") ratio of 41x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 39x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, ZHEJIANG DIBAY ELECTRICLtd has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

See our latest analysis for ZHEJIANG DIBAY ELECTRICLtd

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 ZHEJIANG DIBAY ELECTRICLtd's earnings, revenue and cash flow.

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

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

Retrospectively, the last year delivered an exceptional 63% gain to the company's bottom line. Still, incredibly EPS has fallen 19% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that ZHEJIANG DIBAY ELECTRICLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 the recent negative growth rates.

The Final Word

Its shares have lifted substantially and now ZHEJIANG DIBAY ELECTRICLtd's P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that ZHEJIANG DIBAY ELECTRICLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for ZHEJIANG DIBAY ELECTRICLtd that you need to be mindful of.

If these risks are making you reconsider your opinion on ZHEJIANG DIBAY ELECTRICLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.