Hangzhou Onechance Tech Crop. (SZSE:300792) Stocks Shoot Up 26% But Its P/E Still Looks Reasonable

Hangzhou Onechance Tech Crop. (SZSE:300792) shares have continued their recent momentum with a 26% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.1% over the last year.

Since its price has surged higher, Hangzhou Onechance Tech Crop's price-to-earnings (or "P/E") ratio of 68.5x 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 36x and even P/E's below 21x 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.

With earnings that are retreating more than the market's of late, Hangzhou Onechance Tech Crop has been very sluggish. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Hangzhou Onechance Tech Crop

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 39% 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 76% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 77% over the next year. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we can see why Hangzhou Onechance Tech Crop 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 Hangzhou Onechance Tech Crop's P/E?

The strong share price surge has got Hangzhou Onechance Tech Crop's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Hangzhou Onechance Tech Crop'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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hangzhou Onechance Tech Crop that you should be aware of.

If you're unsure about the strength of Hangzhou Onechance Tech Crop's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.