Despite an already strong run, Zhejiang VIE Science & Technology Co., Ltd. (SZSE:002590) shares have been powering on, with a gain of 32% in the last thirty days. The annual gain comes to 105% following the latest surge, making investors sit up and take notice.
Although its price has surged higher, Zhejiang VIE Science & Technology's price-to-earnings (or "P/E") ratio of 25.4x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 53x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Zhejiang VIE Science & Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Zhejiang VIE Science & Technology's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Zhejiang VIE Science & Technology's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a terrific increase of 346%. Pleasingly, EPS has also lifted 412% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 35% shows it's noticeably more attractive on an annualised basis.
In light of this, it's peculiar that Zhejiang VIE Science & Technology's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Despite Zhejiang VIE Science & Technology's shares building up a head of steam, its P/E still lags most other companies. 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 Zhejiang VIE Science & Technology currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Zhejiang VIE Science & Technology that you should be aware of.
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.