Optimistic Investors Push ShanDongDenghai Seeds Co.,Ltd (SZSE:002041) Shares Up 25% But Growth Is Lacking

ShanDongDenghai Seeds Co.,Ltd (SZSE:002041) shares have continued their recent momentum with a 25% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 26% over that time.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider ShanDongDenghai SeedsLtd as a stock to potentially avoid with its 44.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings that are retreating more than the market's of late, ShanDongDenghai SeedsLtd has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for ShanDongDenghai SeedsLtd

Keen to find out how analysts think ShanDongDenghai SeedsLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For ShanDongDenghai SeedsLtd?

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

Retrospectively, the last year delivered a frustrating 7.3% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 36% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 44% during the coming year according to the five analysts following the company. That's shaping up to be similar to the 41% growth forecast for the broader market.

With this information, we find it interesting that ShanDongDenghai SeedsLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From ShanDongDenghai SeedsLtd's P/E?

ShanDongDenghai SeedsLtd'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 ShanDongDenghai SeedsLtd 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for ShanDongDenghai SeedsLtd that you need to take into consideration.

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.