Sichuan Joyou Digital Technologies Co.,Ltd. (SZSE:301172) Stock Rockets 33% As Investors Are Less Pessimistic Than Expected

Simply Wall St · 10/14 22:31

Sichuan Joyou Digital Technologies Co.,Ltd. (SZSE:301172) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 31% in the last twelve months.

Following the firm bounce in price, Sichuan Joyou Digital TechnologiesLtd's price-to-earnings (or "P/E") ratio of 67.6x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 31x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

As an illustration, earnings have deteriorated at Sichuan Joyou Digital TechnologiesLtd over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Sichuan Joyou Digital TechnologiesLtd

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SZSE:301172 Price to Earnings Ratio vs Industry October 14th 2024
Although there are no analyst estimates available for Sichuan Joyou Digital TechnologiesLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

Sichuan Joyou Digital TechnologiesLtd's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 45%. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's alarming that Sichuan Joyou Digital TechnologiesLtd's P/E sits above the majority of other companies. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Sichuan Joyou Digital TechnologiesLtd's P/E

Sichuan Joyou Digital TechnologiesLtd's 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.

Our examination of Sichuan Joyou Digital TechnologiesLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Sichuan Joyou Digital TechnologiesLtd you should know about.

If you're unsure about the strength of Sichuan Joyou Digital TechnologiesLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.