There's Reason For Concern Over Doctorglasses Chain Co.,Ltd.'s (SZSE:300622) Massive 25% Price Jump

Doctorglasses Chain Co.,Ltd. (SZSE:300622) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 81%.

Since its price has surged higher, Doctorglasses ChainLtd's price-to-earnings (or "P/E") ratio of 55.5x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Doctorglasses ChainLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Doctorglasses ChainLtd

Want the full picture on analyst estimates for the company? Then our free report on Doctorglasses ChainLtd will help you uncover what's on the horizon.

Is There Enough Growth For Doctorglasses ChainLtd?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 25% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

In light of this, it's alarming that Doctorglasses ChainLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Doctorglasses ChainLtd's P/E is flying high just like its stock has during the last month. 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 Doctorglasses ChainLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Doctorglasses ChainLtd (1 is a bit unpleasant) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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.