Jiangsu Hanvo Safety Product Co., Ltd.'s (SZSE:300952) 33% Share Price Surge Not Quite Adding Up

Jiangsu Hanvo Safety Product Co., Ltd. (SZSE:300952) shares have continued their recent momentum with a 33% gain in the last month alone. The annual gain comes to 107% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Jiangsu Hanvo Safety Product as a stock to potentially avoid with its 41.2x 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 as high as it is.

With earnings that are retreating more than the market's of late, Jiangsu Hanvo Safety Product 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.

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Is There Enough Growth For Jiangsu Hanvo Safety Product?

Jiangsu Hanvo Safety Product's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 6.1%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 37% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 37%, which is not materially different.

In light of this, it's curious that Jiangsu Hanvo Safety Product's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Jiangsu Hanvo Safety Product's P/E?

Jiangsu Hanvo Safety Product's P/E is getting right up there since its shares have risen strongly. 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 Jiangsu Hanvo Safety Product's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Jiangsu Hanvo Safety Product (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

If you're unsure about the strength of Jiangsu Hanvo Safety Product'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.