Changchun High-Tech Industry (Group) Co., Ltd.'s (SZSE:000661) Share Price Boosted 33% But Its Business Prospects Need A Lift Too

Changchun High-Tech Industry (Group) Co., Ltd. (SZSE:000661) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 21% over that time.

Although its price has surged higher, Changchun High-Tech Industry (Group)'s price-to-earnings (or "P/E") ratio of 10.8x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 58x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times haven't been advantageous for Changchun High-Tech Industry (Group) as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is Changchun High-Tech Industry (Group)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Changchun High-Tech Industry (Group)'s is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's bottom line. Regardless, EPS has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 12% per year over the next three years. That's shaping up to be materially lower than the 19% per year growth forecast for the broader market.

In light of this, it's understandable that Changchun High-Tech Industry (Group)'s P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Changchun High-Tech Industry (Group)'s P/E

Shares in Changchun High-Tech Industry (Group) are going to need a lot more upward momentum to get the company's P/E out of its slump. 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 Changchun High-Tech Industry (Group)'s analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Changchun High-Tech Industry (Group) with six simple checks.

If these risks are making you reconsider your opinion on Changchun High-Tech Industry (Group), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.