ChengDu Hi-Tech Development Co., Ltd.'s (SZSE:000628) 33% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/ERatio

ChengDu Hi-Tech Development Co., Ltd. (SZSE:000628) shares have retraced a considerable 33% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 282%.

Even after such a large drop in price, ChengDu Hi-Tech Development may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 53.8x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

ChengDu Hi-Tech Development certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for ChengDu Hi-Tech Development

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on ChengDu Hi-Tech Development will help you shine a light on its historical performance.

How Is ChengDu Hi-Tech Development's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 85% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 36% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that ChengDu Hi-Tech Development is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

A significant share price dive has done very little to deflate ChengDu Hi-Tech Development's very lofty P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of ChengDu Hi-Tech Development revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term 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 2 warning signs with ChengDu Hi-Tech Development, and understanding them should be part of your investment process.

If you're unsure about the strength of ChengDu Hi-Tech 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.