Market Participants Recognise Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd.'s (SHSE:600895) Earnings Pushing Shares 39% Higher

Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. (SHSE:600895) shares have continued their recent momentum with a 39% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 46%.

After such a large jump in price, Shanghai Zhangjiang Hi-Tech Park Development's price-to-earnings (or "P/E") ratio of 73.2x 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, Shanghai Zhangjiang Hi-Tech Park Development 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Shanghai Zhangjiang Hi-Tech Park Development

Keen to find out how analysts think Shanghai Zhangjiang Hi-Tech Park Development's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Shanghai Zhangjiang Hi-Tech Park Development's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. As a result, earnings from three years ago have also fallen 59% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 47% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

In light of this, it's understandable that Shanghai Zhangjiang Hi-Tech Park Development's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Shanghai Zhangjiang Hi-Tech Park Development's P/E?

Shares in Shanghai Zhangjiang Hi-Tech Park Development have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Shanghai Zhangjiang Hi-Tech Park Development'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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shanghai Zhangjiang Hi-Tech Park Development you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're unsure about the strength of Shanghai Zhangjiang Hi-Tech Park Development'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.