Those holding Chengdu CORPRO Technology Co.,Ltd. (SZSE:300101) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 41% over that time.
Since its price has surged higher, Chengdu CORPRO TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 45.1x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.
As an illustration, earnings have deteriorated at Chengdu CORPRO TechnologyLtd over the last year, which is not ideal at all. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
There's an inherent assumption that a company should outperform the market for P/E ratios like Chengdu CORPRO TechnologyLtd's to be considered reasonable.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 4.3%. Still, the latest three year period has seen an excellent 383% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.
This is in contrast to the rest of the market, which is expected to grow by 40% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we can see why Chengdu CORPRO TechnologyLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Bottom Line On Chengdu CORPRO TechnologyLtd's P/E
The large bounce in Chengdu CORPRO TechnologyLtd's shares has lifted the company's P/E to a fairly high level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
We've established that Chengdu CORPRO TechnologyLtd maintains its high P/E on the strength of its recent three-year growth being higher than the wider market forecast, as expected. Right now shareholders are comfortable with the P/E as they are quite confident earnings aren't under threat. If recent medium-term earnings trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.
You need to take note of risks, for example - Chengdu CORPRO TechnologyLtd has 2 warning signs (and 1 which is concerning) we think you should know about.
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.
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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.