What Shenzhen Zhaowei Machinery & Electronics Co., Ltd.'s (SZSE:003021) 34% Share Price Gain Is Not Telling You - Simply Wall St News

Shenzhen Zhaowei Machinery & Electronics Co., Ltd. (SZSE:003021) shares have had a really impressive month, gaining 34% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.6% in the last twelve months.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Shenzhen Zhaowei Machinery & Electronics as a stock to avoid entirely with its 56.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been pleasing for Shenzhen Zhaowei Machinery & Electronics as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Shenzhen Zhaowei Machinery & Electronics

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenzhen Zhaowei Machinery & Electronics' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 20% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 20% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 19% per year over the next three years. With the market predicted to deliver 18% growth each year, the company is positioned for a comparable earnings result.

With this information, we find it interesting that Shenzhen Zhaowei Machinery & Electronics is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

Shenzhen Zhaowei Machinery & Electronics' P/E is flying high just like its stock has during the last month. 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 Shenzhen Zhaowei Machinery & Electronics currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with Shenzhen Zhaowei Machinery & Electronics.

You might be able to find a better investment than Shenzhen Zhaowei Machinery & Electronics. 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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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.

Shenzhen Zhaowei Machinery & Electronics Co., Ltd.

Flawless balance sheet with high growth potential.