Why Investors Shouldn't Be Surprised By Huachuang Yunxin Digital Technology Co., Ltd.'s (SHSE:600155) P/E

With a price-to-earnings (or "P/E") ratio of 44.9x Huachuang Yunxin Digital Technology Co., Ltd. (SHSE:600155) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Huachuang Yunxin Digital Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Huachuang Yunxin Digital Technology

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Is There Enough Growth For Huachuang Yunxin Digital Technology?

In order to justify its P/E ratio, Huachuang Yunxin Digital Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 34% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 119% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Huachuang Yunxin Digital Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Huachuang Yunxin Digital Technology's P/E

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Huachuang Yunxin Digital Technology 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.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Huachuang Yunxin Digital Technology that you need to be mindful of.

If you're unsure about the strength of Huachuang Yunxin Digital 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.