Earnings Tell The Story For Shanghai Milkground Food Tech Co., Ltd (SHSE:600882) As Its Stock Soars 34%

The Shanghai Milkground Food Tech Co., Ltd (SHSE:600882) share price has done very well over the last month, posting an excellent gain of 34%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.1% over the last year.

Since its price has surged higher, Shanghai Milkground Food Tech may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 75.1x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. 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 its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Milkground Food Tech has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shanghai Milkground Food Tech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Milkground Food Tech.

Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Milkground Food Tech's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 232%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 34% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 27% each year as estimated by the nine analysts watching the company. That's shaping up to be materially higher than the 19% each year growth forecast for the broader market.

With this information, we can see why Shanghai Milkground Food Tech is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Shanghai Milkground Food Tech's P/E

The strong share price surge has got Shanghai Milkground Food Tech's P/E rushing to great heights as well. 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 Shanghai Milkground Food Tech maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Shanghai Milkground Food Tech with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.