China Literature Limited (HKG:772), might not be a large cap stock, but it saw a significant share price rise of 22% in the past couple of months on the SEHK. Shareholders may appreciate the recent price jump, but the company still has a way to go before reaching its yearly highs again. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company's outlook is already priced into the stock. But what if there is still an opportunity to buy? Today we will analyse the most recent data on China Literature's outlook and valuation to see if the opportunity still exists.
Is China Literature Still Cheap?
According to our price multiple model, where we compare the company's price-to-earnings ratio to the industry average, the stock currently looks expensive. We've used the price-to-earnings ratio in this instance because there's not enough visibility to forecast its cash flows. The stock's ratio of 29.66x is currently well-above the industry average of 9.4x, meaning that it is trading at a more expensive price relative to its peers. Furthermore, China Literature's share price also seems relatively stable compared to the rest of the market, as indicated by its low beta. If you believe the share price should eventually reach levels around its industry peers, a low beta could suggest it is unlikely to rapidly do so anytime soon, and once it's there, it may be hard to fall back down into an attractive buying range.
What does the future of China Literature look like?
Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it's the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. China Literature's earnings over the next few years are expected to increase by 71%, indicating a highly optimistic future ahead. This should lead to more robust cash flows, feeding into a higher share value.
What This Means For You
Are you a shareholder? 772's optimistic future growth appears to have been factored into the current share price, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe 772 should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.
Are you a potential investor? If you've been keeping an eye on 772 for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for 772, which means it's worth diving deeper into other factors in order to take advantage of the next price drop.
Diving deeper into the forecasts for China Literature mentioned earlier will help you understand how analysts view the stock going forward. Luckily, you can check out what analysts are forecasting by clicking here.
If you are no longer interested in China Literature, you can use our free platform to see our list of over 50 other stocks with a high growth potential.
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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.