Shenzhen Hui Chuang Da Technology Co., Ltd.'s (SZSE:300909) 44% Share Price Surge Not Quite Adding Up

Shenzhen Hui Chuang Da Technology Co., Ltd. (SZSE:300909) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.3% in the last twelve months.

Following the firm bounce in price, Shenzhen Hui Chuang Da Technology may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41.2x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. 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.

The earnings growth achieved at Shenzhen Hui Chuang Da Technology over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be 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.

See our latest analysis for Shenzhen Hui Chuang Da Technology

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 Shenzhen Hui Chuang Da Technology's earnings, revenue and cash flow.

How Is Shenzhen Hui Chuang Da Technology's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Shenzhen Hui Chuang Da Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 16%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 28% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shenzhen Hui Chuang Da Technology is trading at a P/E higher than the market. 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 Hui Chuang Da Technology's P/E

Shenzhen Hui Chuang Da Technology 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.

We've established that Shenzhen Hui Chuang Da Technology 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.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Shenzhen Hui Chuang Da Technology with six simple checks on some of these key factors.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.