Subdued Growth No Barrier To Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) With Shares Advancing 39%

Shenzhen Zhilai Sci and Tech Co., Ltd. (SZSE:300771) shareholders have had their patience rewarded with a 39% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 9.9% isn't as attractive.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Shenzhen Zhilai Sci and Tech as a stock to avoid entirely with its 61.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Earnings have risen firmly for Shenzhen Zhilai Sci and Tech recently, which is pleasing to see. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Shenzhen Zhilai Sci and Tech

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Zhilai Sci and Tech will help you shine a light on its historical performance.

How Is Shenzhen Zhilai Sci and Tech's Growth Trending?

In order to justify its P/E ratio, Shenzhen Zhilai Sci and Tech would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 73% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's alarming that Shenzhen Zhilai Sci and Tech'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 Bottom Line On Shenzhen Zhilai Sci and Tech's P/E

Shenzhen Zhilai Sci and Tech's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Shenzhen Zhilai Sci and Tech currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Shenzhen Zhilai Sci and Tech is showing 4 warning signs in our investment analysis, and 2 of those don't sit too well with us.

Of course, you might also be able to find a better stock than Shenzhen Zhilai Sci and Tech. 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.