Earnings Not Telling The Story For Hangzhou Dadi Haiyang Environmental Protection Co., Ltd. (SZSE:301068) After Shares Rise 26%

Hangzhou Dadi Haiyang Environmental Protection Co., Ltd. (SZSE:301068) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 53%.

After such a large jump in price, Hangzhou Dadi Haiyang Environmental Protection may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 57.1x, since almost half of all companies in China have P/E ratios under 39x and even P/E's lower than 22x 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 as high as it is.

Recent times have been quite advantageous for Hangzhou Dadi Haiyang Environmental Protection 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Hangzhou Dadi Haiyang Environmental Protection

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Is There Enough Growth For Hangzhou Dadi Haiyang Environmental Protection?

The only time you'd be truly comfortable seeing a P/E as high as Hangzhou Dadi Haiyang Environmental Protection's is when the company's growth is on track to outshine the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Hangzhou Dadi Haiyang Environmental Protection is trading at a P/E higher than the market. 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 Final Word

The large bounce in Hangzhou Dadi Haiyang Environmental Protection's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Hangzhou Dadi Haiyang Environmental Protection currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Hangzhou Dadi Haiyang Environmental Protection you should be aware of, and 1 of them doesn't sit too well with us.

If you're unsure about the strength of Hangzhou Dadi Haiyang Environmental Protection'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.