Optimistic Investors Push Hangzhou Wensli Silk Culture Co., Ltd. (SZSE:301066) Shares Up 29% But Growth Is Lacking

Despite an already strong run, Hangzhou Wensli Silk Culture Co., Ltd. (SZSE:301066) shares have been powering on, with a gain of 29% in the last thirty days. The annual gain comes to 107% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Hangzhou Wensli Silk Culture as a stock to avoid entirely with its 79.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Hangzhou Wensli Silk Culture has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hangzhou Wensli Silk Culture

Although there are no analyst estimates available for Hangzhou Wensli Silk Culture, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as Hangzhou Wensli Silk Culture's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 335% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 58% drop in EPS 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 Wensli Silk Culture 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 Bottom Line On Hangzhou Wensli Silk Culture's P/E

Shares in Hangzhou Wensli Silk Culture have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Hangzhou Wensli Silk Culture currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 3 warning signs we've spotted with Hangzhou Wensli Silk Culture.

If you're unsure about the strength of Hangzhou Wensli Silk Culture'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.