Earnings Tell The Story For Guangdong Shenling Environmental Systems Co., Ltd. (SZSE:301018) As Its Stock Soars 36%

Guangdong Shenling Environmental Systems Co., Ltd. (SZSE:301018) shareholders have had their patience rewarded with a 36% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.2% in the last twelve months.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Guangdong Shenling Environmental Systems as a stock to avoid entirely with its 51.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings that are retreating more than the market's of late, Guangdong Shenling Environmental Systems has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Guangdong Shenling Environmental Systems

Want the full picture on analyst estimates for the company? Then our free report on Guangdong Shenling Environmental Systems will help you uncover what's on the horizon.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Guangdong Shenling Environmental Systems' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. The last three years don't look nice either as the company has shrunk EPS by 42% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 33% per year over the next three years. That's shaping up to be materially higher than the 18% per year growth forecast for the broader market.

In light of this, it's understandable that Guangdong Shenling Environmental Systems' 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 Key Takeaway

Guangdong Shenling Environmental Systems' P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Guangdong Shenling Environmental Systems' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for Guangdong Shenling Environmental Systems that you need to take into consideration.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.