Why Investors Shouldn't Be Surprised By Shenwan Hongyuan Group Co., Ltd.'s (SZSE:000166) 27% Share Price Surge

The Shenwan Hongyuan Group Co., Ltd. (SZSE:000166) share price has done very well over the last month, posting an excellent gain of 27%. The last 30 days bring the annual gain to a very sharp 32%.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Shenwan Hongyuan Group as a stock to avoid entirely with its 48x 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.

Recent times haven't been advantageous for Shenwan Hongyuan Group as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Shenwan Hongyuan Group

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

In order to justify its P/E ratio, Shenwan Hongyuan Group would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 5.9%. The last three years don't look nice either as the company has shrunk EPS by 64% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 44% per year over the next three years. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

With this information, we can see why Shenwan Hongyuan Group 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 Bottom Line On Shenwan Hongyuan Group's P/E

The strong share price surge has got Shenwan Hongyuan Group's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Shenwan Hongyuan Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Shenwan Hongyuan Group with six simple checks.

If these risks are making you reconsider your opinion on Shenwan Hongyuan Group, 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.