Zhejiang VIE Science & Technology Co., Ltd. (SZSE:002590) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 35% in the last year.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about Zhejiang VIE Science & Technology's P/E ratio of 27.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Zhejiang VIE Science & Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Is There Some Growth For Zhejiang VIE Science & Technology?
There's an inherent assumption that a company should be matching the market for P/E ratios like Zhejiang VIE Science & Technology's to be considered reasonable.
Taking a look back first, we see that the company grew earnings per share by an impressive 175% last year. The latest three year period has also seen an excellent 92% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it interesting that Zhejiang VIE Science & Technology is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Final Word
Its shares have lifted substantially and now Zhejiang VIE Science & Technology's P/E is also back up to the market median. 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.
Our examination of Zhejiang VIE Science & Technology revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
You always need to take note of risks, for example - Zhejiang VIE Science & Technology has 1 warning sign we think you should be aware of.
You might be able to find a better investment than Zhejiang VIE Science & Technology. 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.