Investor Optimism Abounds Fujian Zhangzhou Development Co.,LTD. (SZSE:000753) But Growth Is Lacking

With a price-to-earnings (or "P/E") ratio of 40.9x Fujian Zhangzhou Development Co.,LTD. (SZSE:000753) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 19x 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 growth that's exceedingly strong of late, Fujian Zhangzhou DevelopmentLTD has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Fujian Zhangzhou DevelopmentLTD

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Fujian Zhangzhou DevelopmentLTD will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Fujian Zhangzhou DevelopmentLTD's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 71% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 39% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that Fujian Zhangzhou DevelopmentLTD is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Fujian Zhangzhou DevelopmentLTD's 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 Fujian Zhangzhou DevelopmentLTD currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Fujian Zhangzhou DevelopmentLTD (2 are concerning!) that you need to be mindful of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.