Freewon China Co.,Ltd. (SHSE:688678) Stocks Shoot Up 31% But Its P/E Still Looks Reasonable

Freewon China Co.,Ltd. (SHSE:688678) shareholders have had their patience rewarded with a 31% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 98% in the last year.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Freewon ChinaLtd as a stock to potentially avoid with its 43x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

The recently shrinking earnings for Freewon ChinaLtd have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Freewon ChinaLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Freewon ChinaLtd.

How Is Freewon ChinaLtd's Growth Trending?

Freewon ChinaLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 26% decline in EPS over the last three years in total. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 57% as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

With this information, we can see why Freewon ChinaLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Freewon ChinaLtd's P/E?

Freewon ChinaLtd shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Freewon ChinaLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about these 3 warning signs we've spotted with Freewon ChinaLtd (including 1 which is significant).

If you're unsure about the strength of Freewon ChinaLtd'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.