Optimistic Investors Push ChengDu Hi-Tech Development Co., Ltd. (SZSE:000628) Shares Up 40% But Growth Is Lacking

ChengDu Hi-Tech Development Co., Ltd. (SZSE:000628) shares have had a really impressive month, gaining 40% after a shaky period beforehand. This latest share price bounce rounds out a remarkable 302% gain over the last twelve months.

After such a large jump in price, ChengDu Hi-Tech Development's price-to-earnings (or "P/E") ratio of 57.6x 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 29x and even P/E's below 18x 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.

Recent times have been quite advantageous for ChengDu Hi-Tech Development as its earnings have been rising very briskly. 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 186% gain to the company's bottom line. Pleasingly, EPS has also lifted 106% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that ChengDu Hi-Tech Development's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

ChengDu Hi-Tech Development's P/E is flying high just like its stock has during the last month. 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.

We've established that ChengDu Hi-Tech Development currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for ChengDu Hi-Tech Development you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.