Why We're Not Concerned About Zhejiang Zhaolong Interconnect Technology Co.,Ltd.'s (SZSE:300913) Share Price

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Zhejiang Zhaolong Interconnect Technology Co.,Ltd. (SZSE:300913) as a stock to avoid entirely with its 70x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Zhejiang Zhaolong Interconnect TechnologyLtd's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Check out our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

Want the full picture on analyst estimates for the company? Then our free report on Zhejiang Zhaolong Interconnect TechnologyLtd will help you uncover what's on the horizon.

Is There Enough Growth For Zhejiang Zhaolong Interconnect TechnologyLtd?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 21%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 27% each year during the coming three years according to the only analyst following the company. That's shaping up to be materially higher than the 23% per year growth forecast for the broader market.

In light of this, it's understandable that Zhejiang Zhaolong Interconnect TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Zhejiang Zhaolong Interconnect TechnologyLtd's P/E?

It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Zhejiang Zhaolong Interconnect TechnologyLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Zhejiang Zhaolong Interconnect TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.