Zhejiang Shibao Company Limited (HKG:1057) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Zhejiang Shibao Company Limited (HKG:1057) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 71% in the last year.

Following the firm bounce in price, Zhejiang Shibao's price-to-earnings (or "P/E") ratio of 20.3x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 12x and even P/E's below 7x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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The earnings growth achieved at Zhejiang Shibao over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Zhejiang Shibao

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhejiang Shibao's earnings, revenue and cash flow.

How Is Zhejiang Shibao's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Zhejiang Shibao's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 23% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing that to the market, which is predicted to deliver 21% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Zhejiang Shibao is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Zhejiang Shibao's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Zhejiang Shibao revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Zhejiang Shibao with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Zhejiang Shibao'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.