There's Reason For Concern Over Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd.'s (SHSE:600895) Massive 29% Price Jump

Shanghai Zhangjiang Hi-Tech Park Development Co., Ltd. (SHSE:600895) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 11% in the last twelve months.

After such a large jump in price, Shanghai Zhangjiang Hi-Tech Park Development may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.6x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. However, the P/E might be 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

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Zhangjiang Hi-Tech Park Development.

Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 69% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 11% each year over the next three years. Meanwhile, the rest of the market is forecast to expand by 19% per year, which is noticeably more attractive.

With this information, we find it concerning that Shanghai Zhangjiang Hi-Tech Park Development is trading at a P/E higher than the market. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Shanghai Zhangjiang Hi-Tech Park Development's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Shanghai Zhangjiang Hi-Tech Park Development currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shanghai Zhangjiang Hi-Tech Park Development (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

You might be able to find a better investment than Shanghai Zhangjiang Hi-Tech Park Development. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.