The Hangzhou Electronic Soul Network Technology Co., Ltd. (SHSE:603258) share price has fared very poorly over the last month, falling by a substantial 26%. For any long-term shareholders, the last month ends a year to forget by locking in a 66% share price decline.
Even after such a large drop 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 Electronic Soul Network Technology as a stock to avoid entirely with its 69x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
Hangzhou Electronic Soul Network Technology hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.
How Is Hangzhou Electronic Soul Network Technology's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as steep as Hangzhou Electronic Soul Network Technology's is when the company's growth is on track to outshine the market decidedly.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 72%. As a result, earnings from three years ago have also fallen 86% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 78% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 21% per year, which is noticeably less attractive.
In light of this, it's understandable that Hangzhou Electronic Soul Network Technology's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Hangzhou Electronic Soul Network Technology's P/E?
A significant share price dive has done very little to deflate Hangzhou Electronic Soul Network Technology's very lofty P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Hangzhou Electronic Soul Network Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Hangzhou Electronic Soul Network Technology, and understanding these should be part of your investment process.
If you're unsure about the strength of Hangzhou Electronic Soul Network Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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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.