Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) Stocks Shoot Up 42% But Its P/E Still Looks Reasonable

Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) shares have had a really impressive month, gaining 42% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.0% in the last twelve months.

Following the firm bounce in price, Beijing Zhidemai Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 79.2x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Beijing Zhidemai Technology 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 Beijing Zhidemai Technology

Keen to find out how analysts think Beijing Zhidemai Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Beijing Zhidemai Technology?

Beijing Zhidemai Technology's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

Retrospectively, the last year delivered a frustrating 40% 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 70% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 41% each year during the coming three years according to the dual analysts following the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

With this information, we can see why Beijing Zhidemai Technology 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 Beijing Zhidemai Technology's P/E?

Shares in Beijing Zhidemai Technology 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.

As we suspected, our examination of Beijing Zhidemai Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Beijing Zhidemai Technology you should know about.

Of course, you might also be able to find a better stock than Beijing Zhidemai Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.