With A 27% Price Drop For Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) You'll Still Get What You Pay For

Beijing Zhidemai Technology Co., Ltd. (SZSE:300785) shares have had a horrible month, losing 27% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 42% share price drop.

Although its price has dipped substantially, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may still consider Beijing Zhidemai Technology as a stock to avoid entirely with its 64.3x 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.

While the market has experienced earnings growth lately, Beijing Zhidemai Technology's earnings have gone into reverse gear, which is not great. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Beijing Zhidemai Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Beijing Zhidemai Technology.

How Is Beijing Zhidemai Technology's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 61%. 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.

Turning to the outlook, the next three years should generate growth of 59% per year as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 25% each year growth forecast for the broader market.

In light of this, it's understandable that Beijing Zhidemai Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Beijing Zhidemai Technology's shares may have retreated, but its P/E is still flying high. 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. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Beijing Zhidemai Technology (1 doesn't sit too well with us) you should be aware of.

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.