Shenzhen Zhaowei Machinery & Electronics Co., Ltd. (SZSE:003021) Shares Slammed 27% But Getting In Cheap Might Be Difficult Regardless

Shenzhen Zhaowei Machinery & Electronics Co., Ltd. (SZSE:003021) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 31% share price drop.

Although its price has dipped substantially, Shenzhen Zhaowei Machinery & Electronics may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 49.3x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 so lofty.

With earnings growth that's superior to most other companies of late, Shenzhen Zhaowei Machinery & Electronics has been doing relatively well. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shenzhen Zhaowei Machinery & Electronics

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shenzhen Zhaowei Machinery & Electronics.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Shenzhen Zhaowei Machinery & Electronics' is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 20%. Still, incredibly EPS has fallen 43% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 29% per annum over the next three years. With the market only predicted to deliver 21% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Shenzhen Zhaowei Machinery & Electronics is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Shenzhen Zhaowei Machinery & Electronics' P/E

A significant share price dive has done very little to deflate Shenzhen Zhaowei Machinery & Electronics' very lofty P/E. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Shenzhen Zhaowei Machinery & Electronics' 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 this 1 warning sign we've spotted with Shenzhen Zhaowei Machinery & Electronics.

If these risks are making you reconsider your opinion on Shenzhen Zhaowei Machinery & Electronics, 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.