Zhejiang Crystal-Optech Co., Ltd (SZSE:002273) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

Zhejiang Crystal-Optech Co., Ltd (SZSE:002273) shares have continued their recent momentum with a 34% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 73%.

Following the firm bounce in price, Zhejiang Crystal-Optech's price-to-earnings (or "P/E") ratio of 41.5x 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 27x and even P/E's below 16x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been advantageous for Zhejiang Crystal-Optech 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.

View our latest analysis for Zhejiang Crystal-Optech

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

Is There Enough Growth For Zhejiang Crystal-Optech?

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

Retrospectively, the last year delivered an exceptional 18% gain to the company's bottom line. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 17% per annum over the next three years. That's shaping up to be materially lower than the 25% per year growth forecast for the broader market.

With this information, we find it concerning that Zhejiang Crystal-Optech is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Zhejiang Crystal-Optech's P/E

Zhejiang Crystal-Optech's P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Zhejiang Crystal-Optech's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Zhejiang Crystal-Optech.

You might be able to find a better investment than Zhejiang Crystal-Optech. 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.

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