Zhejiang Top Cloud-agri Technology Co.,Ltd.'s (SZSE:301556) 26% Price Boost Is Out Of Tune With Earnings

Zhejiang Top Cloud-agri Technology Co.,Ltd. (SZSE:301556) shares have had a really impressive month, gaining 26% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, Zhejiang Top Cloud-agri TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 70x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Zhejiang Top Cloud-agri TechnologyLtd as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Zhejiang Top Cloud-agri TechnologyLtd

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Is There Enough Growth For Zhejiang Top Cloud-agri TechnologyLtd?

Zhejiang Top Cloud-agri TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a worthy increase of 15%. EPS has also lifted 29% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 39% during the coming year according to the sole analyst following the company. With the market predicted to deliver 38% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Zhejiang Top Cloud-agri TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Zhejiang Top Cloud-agri TechnologyLtd's P/E is flying high just like its stock has during the last month. 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.

We've established that Zhejiang Top Cloud-agri TechnologyLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Zhejiang Top Cloud-agri TechnologyLtd, and understanding should be part of your investment process.

If you're unsure about the strength of Zhejiang Top Cloud-agri TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.