Optimistic Investors Push Yangzhou Seashine New Materials Co.,Ltd. (SZSE:300885) Shares Up 25% But Growth Is Lacking

Despite an already strong run, Yangzhou Seashine New Materials Co.,Ltd. (SZSE:300885) shares have been powering on, with a gain of 25% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Since its price has surged higher, Yangzhou Seashine New MaterialsLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.7x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Yangzhou Seashine New MaterialsLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Yangzhou Seashine New MaterialsLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Yangzhou Seashine New MaterialsLtd will help you shine a light on its historical performance.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Yangzhou Seashine New MaterialsLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 33%. Still, incredibly EPS has fallen 37% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Yangzhou Seashine New MaterialsLtd 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Yangzhou Seashine New MaterialsLtd's P/E?

Yangzhou Seashine New MaterialsLtd's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Yangzhou Seashine New MaterialsLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

Before you settle on your opinion, we've discovered 3 warning signs for Yangzhou Seashine New MaterialsLtd (2 make us uncomfortable!) that you should be aware of.

If you're unsure about the strength of Yangzhou Seashine New MaterialsLtd'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.