Zhejiang Zhaolong Interconnect Technology Co.,Ltd. (SZSE:300913) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Zhejiang Zhaolong Interconnect Technology Co.,Ltd. (SZSE:300913) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 101% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Zhejiang Zhaolong Interconnect TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 75.1x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Zhejiang Zhaolong Interconnect TechnologyLtd has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Zhejiang Zhaolong Interconnect TechnologyLtd

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What Are Growth Metrics Telling Us About The High P/E?

Zhejiang Zhaolong Interconnect TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 22% decrease to the company's bottom line. 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.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 47% over the next year. That's shaping up to be materially higher than the 41% 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.

The Key Takeaway

Zhejiang Zhaolong Interconnect TechnologyLtd's P/E is flying high just like its stock has during the last month. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

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. 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.

Having said that, be aware Zhejiang Zhaolong Interconnect TechnologyLtd is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Zhejiang Zhaolong Interconnect TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.