Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd. (SHSE:600663) Stock Rockets 42% As Investors Are Less Pessimistic Than Expected

Shanghai Lujiazui Finance & Trade Zone Development Co.,Ltd. (SHSE:600663) shares have had a really impressive month, gaining 42% after a shaky period beforehand. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd as a stock to avoid entirely with its 58.7x 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.

Recent times have been pleasing for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd

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How Is Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's Growth Trending?

Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd'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.

If we review the last year of earnings growth, the company posted a terrific increase of 66%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 83% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to slump, contracting by 2.8% per annum during the coming three years according to the two analysts following the company. With the market predicted to deliver 19% growth per annum, that's a disappointing outcome.

In light of this, it's alarming that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as these declining earnings are likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd 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.

We've established that Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd currently trades on a much higher than expected P/E for a company whose earnings are forecast to decline. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings are highly unlikely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Shanghai Lujiazui Finance & Trade Zone DevelopmentLtd (1 is a bit concerning!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.