Zhejiang Hechuan Technology Co., Ltd.'s (SHSE:688320) 28% Cheaper Price Remains In Tune With Earnings

The Zhejiang Hechuan Technology Co., Ltd. (SHSE:688320) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 36% share price drop.

Even after such a large drop in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Zhejiang Hechuan Technology as a stock to avoid entirely with its 70.5x P/E ratio. 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.

Zhejiang Hechuan Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhejiang Hechuan Technology

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How Is Zhejiang Hechuan Technology's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Zhejiang Hechuan Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 46% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 63% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 71% over the next year. Meanwhile, the rest of the market is forecast to only expand by 36%, which is noticeably less attractive.

In light of this, it's understandable that Zhejiang Hechuan Technology'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 Zhejiang Hechuan Technology's P/E?

Even after such a strong price drop, Zhejiang Hechuan Technology's P/E still exceeds the rest of the market significantly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Zhejiang Hechuan Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Zhejiang Hechuan Technology has 2 warning signs we think you should be aware of.

If you're unsure about the strength of Zhejiang Hechuan Technology'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.