Gaona Aero Material Co., Ltd. (SZSE:300034) Stocks Shoot Up 47% But Its P/E Still Looks Reasonable

Gaona Aero Material Co., Ltd. (SZSE:300034) shareholders would be excited to see that the share price has had a great month, posting a 47% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Gaona Aero Material as a stock to potentially avoid with its 44.3x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Gaona Aero Material has been struggling lately as its earnings have declined faster 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.

See our latest analysis for Gaona Aero Material

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What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Gaona Aero Material would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 6.4% decrease to the company's bottom line. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 13% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 27% each year as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

With this information, we can see why Gaona Aero Material is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Gaona Aero Material's P/E

The large bounce in Gaona Aero Material's shares has lifted the company's P/E to a fairly high level. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Gaona Aero Material maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Gaona Aero Material is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Gaona Aero Material. 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.