Zhe Jiang Kangsheng Co.,Ltd.'s (SZSE:002418) Shares Climb 36% But Its Business Is Yet to Catch Up

Zhe Jiang Kangsheng Co.,Ltd. (SZSE:002418) shares have had a really impressive month, gaining 36% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.9% over the last year.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider Zhe Jiang KangshengLtd as a stock to avoid entirely with its 77.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Zhe Jiang KangshengLtd has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Zhe Jiang KangshengLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhe Jiang KangshengLtd's earnings, revenue and cash flow.

Is There Enough Growth For Zhe Jiang KangshengLtd?

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

Retrospectively, the last year delivered an exceptional 134% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 42% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Zhe Jiang KangshengLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 Key Takeaway

Shares in Zhe Jiang KangshengLtd have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Zhe Jiang KangshengLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Zhe Jiang KangshengLtd with six simple checks will allow you to discover any risks that could be an issue.

You might be able to find a better investment than Zhe Jiang KangshengLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.