Sichuan Zhongguang Lightning Protection Technologies Co., Ltd.'s (SZSE:300414) 35% Price Boost Is Out Of Tune With Earnings

Sichuan Zhongguang Lightning Protection Technologies Co., Ltd. (SZSE:300414) shareholders are no doubt pleased to see that the share price has bounced 35% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Following the firm bounce in price, Sichuan Zhongguang Lightning Protection Technologies may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 54.5x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Sichuan Zhongguang Lightning Protection Technologies has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sichuan Zhongguang Lightning Protection Technologies

Although there are no analyst estimates available for Sichuan Zhongguang Lightning Protection Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Sichuan Zhongguang Lightning Protection Technologies?

Sichuan Zhongguang Lightning Protection Technologies' 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 growth, the company posted a terrific increase of 74%. The latest three year period has also seen a 9.4% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good 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 alarming that Sichuan Zhongguang Lightning Protection Technologies' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Sichuan Zhongguang Lightning Protection Technologies' P/E?

Shares in Sichuan Zhongguang Lightning Protection Technologies have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Sichuan Zhongguang Lightning Protection Technologies revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Sichuan Zhongguang Lightning Protection Technologies has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

You might be able to find a better investment than Sichuan Zhongguang Lightning Protection Technologies. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.