Shareholders Should Be Pleased With Zhongji Innolight Co., Ltd.'s (SZSE:300308) Price

Zhongji Innolight Co., Ltd.'s (SZSE:300308) price-to-earnings (or "P/E") ratio of 44.5x 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 31x and even P/E's below 19x 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.

Zhongji Innolight certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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?

In order to justify its P/E ratio, Zhongji Innolight would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 141% gain to the company's bottom line. Pleasingly, EPS has also lifted 202% 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.

Looking ahead now, EPS is anticipated to climb by 42% each year during the coming three years according to the analysts following the company. With the market only predicted to deliver 26% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Zhongji Innolight is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Zhongji Innolight's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Zhongji Innolight.

You might be able to find a better investment than Zhongji Innolight. 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.