Earnings Not Telling The Story For ShenZhen QiangRui Precision Technology Co., Ltd. (SZSE:301128) After Shares Rise 54%

ShenZhen QiangRui Precision Technology Co., Ltd. (SZSE:301128) shareholders have had their patience rewarded with a 54% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 98%.

Following the firm bounce in price, ShenZhen QiangRui Precision Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.4x, since almost half of all companies in China have P/E ratios under 38x and even P/E's lower than 21x are not unusual. 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.

Recent times have been quite advantageous for ShenZhen QiangRui Precision Technology as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for ShenZhen QiangRui Precision Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ShenZhen QiangRui Precision Technology's earnings, revenue and cash flow.

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 ShenZhen QiangRui Precision Technology's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 139% last year. Pleasingly, EPS has also lifted 31% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that ShenZhen QiangRui Precision Technology's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Key Takeaway

The strong share price surge has got ShenZhen QiangRui Precision Technology's P/E rushing to great heights as well. 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.

Our examination of ShenZhen QiangRui Precision Technology 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. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

Plus, you should also learn about these 3 warning signs we've spotted with ShenZhen QiangRui Precision Technology (including 1 which is significant).

If you're unsure about the strength of ShenZhen QiangRui Precision Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.