Earnings Tell The Story For Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) As Its Stock Soars 32%

Shenzhen Ridge Engineering Consulting Co., Ltd. (SZSE:300977) shareholders have had their patience rewarded with a 32% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 8.0% isn't as attractive.

After such a large jump in price, Shenzhen Ridge Engineering Consulting's price-to-earnings (or "P/E") ratio of 62.2x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 32x 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 highly elevated P/E.

Shenzhen Ridge Engineering Consulting certainly has been doing a good job lately as it's been growing earnings more than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Shenzhen Ridge Engineering Consulting

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Is There Enough Growth For Shenzhen Ridge Engineering Consulting?

Shenzhen Ridge Engineering Consulting's 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.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. Still, incredibly EPS has fallen 71% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 38% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 26% per annum, which is noticeably less attractive.

In light of this, it's understandable that Shenzhen Ridge Engineering Consulting's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Shenzhen Ridge Engineering Consulting's P/E

Shenzhen Ridge Engineering Consulting's P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of Shenzhen Ridge Engineering Consulting'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.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shenzhen Ridge Engineering Consulting with six simple checks.

If you're unsure about the strength of Shenzhen Ridge Engineering Consulting's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.