The Market Lifts Zhejiang Fengmao Technology Co., Ltd. (SZSE:301459) Shares 40% But It Can Do More

Zhejiang Fengmao Technology Co., Ltd. (SZSE:301459) shares have continued their recent momentum with a 40% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 82%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Zhejiang Fengmao Technology's P/E ratio of 35x, since the median price-to-earnings (or "P/E") ratio in China is also close to 37x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings that are retreating more than the market's of late, Zhejiang Fengmao Technology has been very sluggish. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Zhejiang Fengmao Technology

Keen to find out how analysts think Zhejiang Fengmao Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Zhejiang Fengmao Technology's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 23%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 50% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 52% over the next year. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

With this information, we find it interesting that Zhejiang Fengmao Technology is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Zhejiang Fengmao Technology's P/E

Zhejiang Fengmao Technology appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Fengmao Technology currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zhejiang Fengmao Technology (1 is a bit concerning) you should be aware of.

If you're unsure about the strength of Zhejiang Fengmao Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.