Pinning Down Zhejiang Chang'an Renheng Technology Co., Ltd.'s (HKG:8139) P/E Is Difficult Right Now

With a price-to-earnings (or "P/E") ratio of 39.8x Zhejiang Chang'an Renheng Technology Co., Ltd. (HKG:8139) may be sending very bearish signals at the moment, given that almost half of all companies in Hong Kong have P/E ratios under 12x and even P/E's lower than 7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

For example, consider that Zhejiang Chang'an Renheng Technology's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

See our latest analysis for Zhejiang Chang'an Renheng Technology

Although there are no analyst estimates available for Zhejiang Chang'an Renheng Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Zhejiang Chang'an Renheng Technology?

The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang Chang'an Renheng Technology's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 45% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 83% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 19% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Zhejiang Chang'an Renheng Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

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.

Our examination of Zhejiang Chang'an Renheng Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 4 warning signs for Zhejiang Chang'an Renheng Technology you should be aware of, and 2 of them don't sit too well with us.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.