Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD.'s (SZSE:300947) 98% Share Price Surge Not Quite Adding Up

Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD. (SZSE:300947) shareholders have had their patience rewarded with a 98% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 53%.

After such a large jump in price, Shanghai DOBE Cultural & Creative Industry Development (Group)Co's price-to-earnings (or "P/E") ratio of 79.9x 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 31x and even P/E's below 19x are quite common. 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.

Shanghai DOBE Cultural & Creative Industry Development (Group)Co 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.

See our latest analysis for Shanghai DOBE Cultural & Creative Industry Development (Group)Co

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai DOBE Cultural & Creative Industry Development (Group)Co will help you shine a light on its historical performance.

How Is Shanghai DOBE Cultural & Creative Industry Development (Group)Co's Growth Trending?

In order to justify its P/E ratio, Shanghai DOBE Cultural & Creative Industry Development (Group)Co would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 339% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 63% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Shanghai DOBE Cultural & Creative Industry Development (Group)Co's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate 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.

What We Can Learn From Shanghai DOBE Cultural & Creative Industry Development (Group)Co's P/E?

Shares in Shanghai DOBE Cultural & Creative Industry Development (Group)Co have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shanghai DOBE Cultural & Creative Industry Development (Group)Co currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shanghai DOBE Cultural & Creative Industry Development (Group)Co (2 are a bit unpleasant) you should be aware of.

Of course, you might also be able to find a better stock than Shanghai DOBE Cultural & Creative Industry Development (Group)Co. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.