Changzheng Engineering Technology Co.,Ltd's (SHSE:603698) 31% Share Price Surge Not Quite Adding Up

Despite an already strong run, Changzheng Engineering Technology Co.,Ltd (SHSE:603698) 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 33% in the last year.

Since its price has surged higher, Changzheng Engineering TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 49.3x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Changzheng Engineering TechnologyLtd as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Changzheng Engineering TechnologyLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Changzheng Engineering TechnologyLtd.

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

Changzheng Engineering TechnologyLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 25% last year. EPS has also lifted 6.2% 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 44% as estimated by the lone analyst watching the company. That's shaping up to be similar to the 40% growth forecast for the broader market.

In light of this, it's curious that Changzheng Engineering TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Bottom Line On Changzheng Engineering TechnologyLtd's P/E

Changzheng Engineering TechnologyLtd's P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Changzheng Engineering TechnologyLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Changzheng Engineering TechnologyLtd you should be aware of.

Of course, you might also be able to find a better stock than Changzheng Engineering TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.