EmbedWay Technologies (Shanghai) Corporation (SHSE:603496) Stocks Pounded By 26% But Not Lagging Market On Growth Or Pricing

The EmbedWay Technologies (Shanghai) Corporation (SHSE:603496) share price has softened a substantial 26% over the previous 30 days, handing back much of the gains the stock has made lately. The recent drop has obliterated the annual return, with the share price now down 4.3% over that longer period.

In spite of the heavy fall in price, EmbedWay Technologies (Shanghai) may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 72.8x, since almost half of all companies in China have P/E ratios under 37x and even P/E's lower than 21x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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Recent times have been advantageous for EmbedWay Technologies (Shanghai) as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for EmbedWay Technologies (Shanghai)

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How Is EmbedWay Technologies (Shanghai)'s Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like EmbedWay Technologies (Shanghai)'s to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 97% last year. The latest three year period has also seen an excellent 62% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 57% during the coming year according to the dual analysts following the company. With the market only predicted to deliver 36%, the company is positioned for a stronger earnings result.

In light of this, it's understandable that EmbedWay Technologies (Shanghai)'s P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From EmbedWay Technologies (Shanghai)'s P/E?

A significant share price dive has done very little to deflate EmbedWay Technologies (Shanghai)'s very lofty P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that EmbedWay Technologies (Shanghai) maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for EmbedWay Technologies (Shanghai) that you should be aware of.

If these risks are making you reconsider your opinion on EmbedWay Technologies (Shanghai), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.