Shuifa Energas Gas Co., Ltd.'s (SHSE:603318) Shares Climb 35% But Its Business Is Yet to Catch Up

Shuifa Energas Gas Co., Ltd. (SHSE:603318) shares have continued their recent momentum with a 35% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 9.2% isn't as attractive.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Shuifa Energas Gas as a stock to potentially avoid with its 48.6x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Shuifa Energas Gas has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Shuifa Energas Gas

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 Shuifa Energas Gas' earnings, revenue and cash flow.

How Is Shuifa Energas Gas' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Shuifa Energas Gas' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. Pleasingly, EPS has also lifted 68% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 39% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Shuifa Energas Gas 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Shuifa Energas Gas' P/E?

Shuifa Energas Gas shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shuifa Energas Gas 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Shuifa Energas Gas that you need to be mindful of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.