After Leaping 42% Zhongji Innolight Co., Ltd. (SZSE:300308) Shares Are Not Flying Under The Radar

Zhongji Innolight Co., Ltd. (SZSE:300308) shares have had a really impressive month, gaining 42% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 87% in the last year.

After such a large jump in price, Zhongji Innolight may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 43.7x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Zhongji Innolight as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Zhongji Innolight

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

How Is Zhongji Innolight's Growth Trending?

Zhongji Innolight's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered an exceptional 200% gain to the company's bottom line. Pleasingly, EPS has also lifted 314% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 37% per annum as estimated by the analysts watching the company. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that Zhongji Innolight'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.

The Final Word

Zhongji Innolight shares have received a push in the right direction, but its P/E is elevated too. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Zhongji Innolight's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 2 warning signs for Zhongji Innolight that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.