Market Might Still Lack Some Conviction On 3onedata Co., Ltd. (SHSE:688618) Even After 26% Share Price Boost

3onedata Co., Ltd. (SHSE:688618) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.2% in the last twelve months.

Although its price has surged higher, it's still not a stretch to say that 3onedata's price-to-earnings (or "P/E") ratio of 39.6x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times haven't been advantageous for 3onedata as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for 3onedata

Keen to find out how analysts think 3onedata's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Growth For 3onedata?

There's an inherent assumption that a company should be matching the market for P/E ratios like 3onedata's to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 42%. Regardless, EPS has managed to lift by a handy 7.9% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 325% as estimated by the one analyst watching the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that 3onedata is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From 3onedata's P/E?

Its shares have lifted substantially and now 3onedata's P/E is also back up to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that 3onedata currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for 3onedata you should know about.

You might be able to find a better investment than 3onedata. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.