Why Investors Shouldn't Be Surprised By Shanghai CEO Environmental Protection Technology Co., Ltd's (SHSE:688335) 38% Share Price Surge

The Shanghai CEO Environmental Protection Technology Co., Ltd (SHSE:688335) share price has done very well over the last month, posting an excellent gain of 38%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 29% over that time.

Following the firm bounce in price, Shanghai CEO Environmental Protection Technology's price-to-earnings (or "P/E") ratio of 38.5x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 33x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Shanghai CEO Environmental Protection Technology as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, 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 Shanghai CEO Environmental Protection Technology

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Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Shanghai CEO Environmental Protection Technology's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 70%. This means it has also seen a slide in earnings over the longer-term as EPS is down 34% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 38% each year as estimated by the only analyst watching the company. With the market only predicted to deliver 19% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Shanghai CEO Environmental Protection Technology is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shanghai CEO Environmental Protection Technology's P/E

Shanghai CEO Environmental Protection Technology shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Shanghai CEO Environmental Protection Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shanghai CEO Environmental Protection Technology you should know about.

Of course, you might also be able to find a better stock than Shanghai CEO Environmental Protection Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.