Optimistic Investors Push Hithink RoyalFlush Information Network Co., Ltd. (SZSE:300033) Shares Up 26% But Growth Is Lacking

Those holding Hithink RoyalFlush Information Network Co., Ltd. (SZSE:300033) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider Hithink RoyalFlush Information Network as a stock to avoid entirely with its 54.1x 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.

Recent times haven't been advantageous for Hithink RoyalFlush Information Network as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hithink RoyalFlush Information Network

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hithink RoyalFlush Information Network.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Hithink RoyalFlush Information Network's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 19% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 17% each year over the next three years. That's shaping up to be materially lower than the 22% each year growth forecast for the broader market.

With this information, we find it concerning that Hithink RoyalFlush Information Network is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Hithink RoyalFlush Information Network's P/E

Shares in Hithink RoyalFlush Information Network have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Hithink RoyalFlush Information Network's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Hithink RoyalFlush Information Network is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Hithink RoyalFlush Information Network, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.