The Hangzhou Heshun Technology Co.,LTD. (SZSE:301237) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 31% in that time.
In spite of the heavy fall in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may still consider Hangzhou Heshun TechnologyLTD as a stock to avoid entirely with its 67.4x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.
Recent times haven't been advantageous for Hangzhou Heshun TechnologyLTD as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Check out our latest analysis for Hangzhou Heshun TechnologyLTD
What Are Growth Metrics Telling Us About The High P/E?
Hangzhou Heshun 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, dishearteningly the company's profits fell to the tune of 72%. This means it has also seen a slide in earnings over the longer-term as EPS is down 61% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 123% over the next year. With the market only predicted to deliver 42%, the company is positioned for a stronger earnings result.
In light of this, it's understandable that Hangzhou Heshun TechnologyLTD's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Final Word
Hangzhou Heshun TechnologyLTD's shares may have retreated, but its P/E is still flying high. 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 Hangzhou Heshun TechnologyLTD's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Having said that, be aware Hangzhou Heshun TechnologyLTD is showing 3 warning signs in our investment analysis, and 2 of those are potentially serious.
You might be able to find a better investment than Hangzhou Heshun TechnologyLTD. 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.