Zhiyang Innovation Technology Co., Ltd. (SHSE:688191) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Zhiyang Innovation Technology Co., Ltd. (SHSE:688191) shares have continued their recent momentum with a 30% gain in the last month alone. Notwithstanding the latest gain, the annual share price return of 9.6% isn't as impressive.

Since its price has surged higher, Zhiyang Innovation Technology's price-to-earnings (or "P/E") ratio of 73.5x 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 36x and even P/E's below 21x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Zhiyang Innovation Technology over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Zhiyang Innovation Technology

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 Zhiyang Innovation Technology's earnings, revenue and cash flow.

How Is Zhiyang Innovation Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Zhiyang Innovation Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 30% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 58% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Zhiyang Innovation Technology is trading at a P/E higher than the market. 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 very 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 Key Takeaway

Shares in Zhiyang Innovation Technology have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Zhiyang Innovation Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 2 warning signs for Zhiyang Innovation Technology you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're unsure about the strength of Zhiyang Innovation Technology'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.