Subdued Growth No Barrier To HangZhou Everfine Photo-e-info Co., Ltd. (SZSE:300306) With Shares Advancing 27%

HangZhou Everfine Photo-e-info Co., Ltd. (SZSE:300306) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 60% in the last year.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider HangZhou Everfine Photo-e-info as a stock to potentially avoid with its 42.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For instance, HangZhou Everfine Photo-e-info's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for HangZhou Everfine Photo-e-info

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on HangZhou Everfine Photo-e-info's earnings, revenue and cash flow.

How Is HangZhou Everfine Photo-e-info's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as HangZhou Everfine Photo-e-info's is when the company's growth is on track to outshine the market.

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 2.9%. This means it has also seen a slide in earnings over the longer-term as EPS is down 12% 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.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that HangZhou Everfine Photo-e-info's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

HangZhou Everfine Photo-e-info shares have received a push in the right direction, but its P/E is elevated too. 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 HangZhou Everfine Photo-e-info revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with HangZhou Everfine Photo-e-info (at least 1 which is significant), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than HangZhou Everfine Photo-e-info. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.