What Fujian Zhangzhou Development Co.,LTD.'s (SZSE:000753) P/E Is Not Telling You

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider Fujian Zhangzhou Development Co.,LTD. (SZSE:000753) as a stock to potentially avoid with its 57.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been quite advantageous for Fujian Zhangzhou DevelopmentLTD as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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?

In order to justify its P/E ratio, Fujian Zhangzhou DevelopmentLTD would need to produce impressive growth in excess of the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 78% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 43% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Fujian Zhangzhou DevelopmentLTD'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.

The Key Takeaway

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 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. 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.

It is also worth noting that we have found 3 warning signs for Fujian Zhangzhou DevelopmentLTD (2 are significant!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.