Zhejiang Wanliyang Co., Ltd. (SZSE:002434) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Zhejiang Wanliyang Co., Ltd. (SZSE:002434) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

Since its price has surged higher, Zhejiang Wanliyang may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 48.4x, since almost half of all companies in China have P/E ratios under 38x and even P/E's lower than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

For instance, Zhejiang Wanliyang's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhejiang Wanliyang

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Wanliyang will help you shine a light on its historical performance.

Is There Enough Growth For Zhejiang Wanliyang?

In order to justify its P/E ratio, Zhejiang Wanliyang would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 62% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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.

With this information, we find it concerning that Zhejiang Wanliyang 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.

What We Can Learn From Zhejiang Wanliyang's P/E?

Zhejiang Wanliyang shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Zhejiang Wanliyang 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Zhejiang Wanliyang has 3 warning signs (and 2 which are significant) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.