Guangzhou Ruoyuchen Technology Co.,Ltd.'s (SZSE:003010) P/E Is Still On The Mark Following 36% Share Price Bounce

Despite an already strong run, Guangzhou Ruoyuchen Technology Co.,Ltd. (SZSE:003010) shares have been powering on, with a gain of 36% in the last thirty days. The annual gain comes to 236% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Guangzhou Ruoyuchen TechnologyLtd's price-to-earnings (or "P/E") ratio of 76.3x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 37x and even P/E's below 21x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Guangzhou Ruoyuchen TechnologyLtd has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Guangzhou Ruoyuchen TechnologyLtd

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Is There Enough Growth For Guangzhou Ruoyuchen TechnologyLtd?

The only time you'd be truly comfortable seeing a P/E as steep as Guangzhou Ruoyuchen TechnologyLtd's is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 60%. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 99% as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

With this information, we can see why Guangzhou Ruoyuchen TechnologyLtd is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has got Guangzhou Ruoyuchen TechnologyLtd's P/E rushing to great heights as well. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Guangzhou Ruoyuchen TechnologyLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Guangzhou Ruoyuchen TechnologyLtd you should know about.

If these risks are making you reconsider your opinion on Guangzhou Ruoyuchen TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.