Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD.'s (SZSE:300947) Shares Climb 28% But Its Business Is Yet to Catch Up

Despite an already strong run, Shanghai DOBE Cultural & Creative Industry Development (Group)Co. LTD. (SZSE:300947) shares have been powering on, with a gain of 28% in the last thirty days. Looking further back, the 17% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Shanghai DOBE Cultural & Creative Industry Development (Group)Co's price-to-earnings (or "P/E") ratio of 68.5x 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 28x and even P/E's below 17x 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.

Recent times have been quite advantageous for Shanghai DOBE Cultural & Creative Industry Development (Group)Co 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 Shanghai DOBE Cultural & Creative Industry Development (Group)Co

Although there are no analyst estimates available for Shanghai DOBE Cultural & Creative Industry Development (Group)Co, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as Shanghai DOBE Cultural & Creative Industry Development (Group)Co's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 339% last year. Still, incredibly EPS has fallen 63% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

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. 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. 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. 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 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Shanghai DOBE Cultural & Creative Industry Development (Group)Co has 3 warning signs (and 2 which are potentially serious) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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