Why Investors Shouldn't Be Surprised By Zhejiang Huace Film & TV Co., Ltd.'s (SZSE:300133) 30% Share Price Surge

Despite an already strong run, Zhejiang Huace Film & TV Co., Ltd. (SZSE:300133) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days bring the annual gain to a very sharp 29%.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Zhejiang Huace Film & TV as a stock to avoid entirely with its 69.3x 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.

Zhejiang Huace Film & TV has been struggling lately as its earnings have declined faster 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Zhejiang Huace Film & TV

Keen to find out how analysts think Zhejiang Huace Film & TV's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang Huace Film & TV's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. As a result, earnings from three years ago have also fallen 59% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 123% over the next year. That's shaping up to be materially higher than the 40% growth forecast for the broader market.

With this information, we can see why Zhejiang Huace Film & TV is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Zhejiang Huace Film & TV's P/E?

Zhejiang Huace Film & TV's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Zhejiang Huace Film & TV's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Zhejiang Huace Film & TV that you should be aware of.

You might be able to find a better investment than Zhejiang Huace Film & TV. 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.