Digiwin Co., Ltd. (SZSE:300378) Stock Rockets 31% As Investors Are Less Pessimistic Than Expected

Digiwin Co., Ltd. (SZSE:300378) shares have continued their recent momentum with a 31% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.9% over the last year.

Following the firm bounce in price, Digiwin's price-to-earnings (or "P/E") ratio of 37.7x might make it look like a 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 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Digiwin has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, 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.

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Keen to find out how analysts think Digiwin's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Digiwin's Growth Trending?

Digiwin's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 10% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 9.0% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 20% per year over the next three years. With the market predicted to deliver 19% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's curious that Digiwin's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in Digiwin's shares has lifted the company's P/E to a fairly high level. 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 Digiwin currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Digiwin (1 is potentially serious!) that you need to take into consideration.

If you're unsure about the strength of Digiwin's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.