What Guangzhou Ruoyuchen Technology Co.,Ltd.'s (SZSE:003010) 31% Share Price Gain Is Not Telling You

Despite an already strong run, Guangzhou Ruoyuchen Technology Co.,Ltd. (SZSE:003010) shares have been powering on, with a gain of 31% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Even after such a large jump in price, it's still not a stretch to say that Guangzhou Ruoyuchen TechnologyLtd's price-to-earnings (or "P/E") ratio of 38.3x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 37x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Guangzhou Ruoyuchen TechnologyLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Check out our latest analysis for Guangzhou Ruoyuchen TechnologyLtd

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

How Is Guangzhou Ruoyuchen TechnologyLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Guangzhou Ruoyuchen TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 60% last year. EPS has also lifted 17% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 40% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Guangzhou Ruoyuchen TechnologyLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Guangzhou Ruoyuchen TechnologyLtd's P/E

Guangzhou Ruoyuchen TechnologyLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Guangzhou Ruoyuchen TechnologyLtd currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Guangzhou Ruoyuchen TechnologyLtd has 1 warning sign we think you should be aware of.

You might be able to find a better investment than Guangzhou Ruoyuchen TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.