Improved Earnings Required Before Shanghai Rongtai Health Technology Corporation Limited (SHSE:603579) Stock's 27% Jump Looks Justified

Shanghai Rongtai Health Technology Corporation Limited (SHSE:603579) shares have continued their recent momentum with a 27% gain in the last month alone. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, Shanghai Rongtai Health Technology may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.2x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 63x 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 limited.

Shanghai Rongtai Health Technology certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Shanghai Rongtai Health Technology

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Is There Any Growth For Shanghai Rongtai Health Technology?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Rongtai Health Technology's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 59%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Turning to the outlook, the next three years should generate growth of 8.9% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 25% per year, which is noticeably more attractive.

With this information, we can see why Shanghai Rongtai Health Technology is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Shanghai Rongtai Health Technology's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Shanghai Rongtai Health Technology maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shanghai Rongtai Health Technology, and understanding should be part of your investment process.

If you're unsure about the strength of Shanghai Rongtai Health Technology'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.