Those holding Zhejiang Jinke Tom Culture Industry Co., LTD. (SZSE:300459) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 24% in the last twelve months.
Since its price has surged higher, Zhejiang Jinke Tom Culture Industry may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.3x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x 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 so lofty.
Recent times haven't been advantageous for Zhejiang Jinke Tom Culture Industry 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.
How Is Zhejiang Jinke Tom Culture Industry's Growth Trending?
Zhejiang Jinke Tom Culture Industry'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.
Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Turning to the outlook, the next year should generate growth of 191% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.
With this information, we can see why Zhejiang Jinke Tom Culture Industry is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Zhejiang Jinke Tom Culture Industry's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
As we suspected, our examination of Zhejiang Jinke Tom Culture Industry's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Zhejiang Jinke Tom Culture Industry that you should be aware of.
Of course, you might also be able to find a better stock than Zhejiang Jinke Tom Culture Industry. 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.