Mesnac Co., Ltd. (SZSE:002073) Soars 34% But It's A Story Of Risk Vs Reward

Despite an already strong run, Mesnac Co., Ltd. (SZSE:002073) shares have been powering on, with a gain of 34% in the last thirty days. The last 30 days bring the annual gain to a very sharp 43%.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Mesnac's P/E ratio of 27.9x, since the median price-to-earnings (or "P/E") ratio in China is also close to 29x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's exceedingly strong of late, Mesnac has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Mesnac

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Mesnac will help you shine a light on its historical performance.

How Is Mesnac's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Mesnac's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 63%. The strong recent performance means it was also able to grow EPS by 221% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 35% shows it's noticeably more attractive on an annualised basis.

With this information, we find it interesting that Mesnac is trading at a fairly similar P/E to the market. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Mesnac's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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.

We've established that Mesnac currently trades on a lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some unobserved threats to earnings preventing the P/E ratio from matching this positive performance. It appears some are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Mesnac, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Mesnac, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.