There's Reason For Concern Over Capital Securities Corporation Limited's (SHSE:601136) Massive 39% Price Jump

Capital Securities Corporation Limited (SHSE:601136) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Looking further back, the 25% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Capital Securities as a stock to avoid entirely with its 79.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Capital Securities has been doing very well. 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.

Check out our latest analysis for Capital Securities

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Capital Securities' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Capital Securities' 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 45%. The latest three year period has also seen a 15% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Capital Securities 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

Shares in Capital Securities have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Capital Securities revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Capital Securities with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Capital Securities, 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.