Earnings Not Telling The Story For Hangzhou Gisway Information Technology Co.,Ltd. (SZSE:301390) After Shares Rise 31%

Hangzhou Gisway Information Technology Co.,Ltd. (SZSE:301390) shares have continued their recent momentum with a 31% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.7% over 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 Hangzhou Gisway Information TechnologyLtd as a stock to potentially avoid with its 42.7x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For instance, Hangzhou Gisway Information TechnologyLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Hangzhou Gisway Information TechnologyLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hangzhou Gisway Information TechnologyLtd's earnings, revenue and cash flow.

Is There Enough Growth For Hangzhou Gisway Information TechnologyLtd?

There's an inherent assumption that a company should outperform the market for P/E ratios like Hangzhou Gisway Information TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 39% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 35% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

With this information, we find it concerning that Hangzhou Gisway Information TechnologyLtd 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Hangzhou Gisway Information TechnologyLtd's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Hangzhou Gisway Information TechnologyLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hangzhou Gisway Information TechnologyLtd, and understanding them should be part of your investment process.

You might be able to find a better investment than Hangzhou Gisway Information 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.