Zhejiang Rongtai Electric Material Co.,Ltd. (SHSE:603119) Stock Rockets 32% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Zhejiang Rongtai Electric Material Co.,Ltd. (SHSE:603119) shares have been powering on, with a gain of 32% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 12% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Zhejiang Rongtai Electric MaterialLtd's price-to-earnings (or "P/E") ratio of 36x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 35x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's exceedingly strong of late, Zhejiang Rongtai Electric MaterialLtd has been doing very well. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Zhejiang Rongtai Electric MaterialLtd

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 Rongtai Electric MaterialLtd's earnings, revenue and cash flow.

Does Growth Match The P/E?

Zhejiang Rongtai Electric MaterialLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a terrific increase of 36%. Pleasingly, EPS has also lifted 102% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Zhejiang Rongtai Electric MaterialLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

What We Can Learn From Zhejiang Rongtai Electric MaterialLtd's P/E?

Zhejiang Rongtai Electric MaterialLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Zhejiang Rongtai Electric MaterialLtd currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Zhejiang Rongtai Electric MaterialLtd with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.