Shanghai Bairun Investment Holding Group Co., Ltd.'s (SZSE:002568) 26% Price Boost Is Out Of Tune With Earnings

Shanghai Bairun Investment Holding Group Co., Ltd. (SZSE:002568) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 38% over that time.

In spite of the firm bounce in price, there still wouldn't be many who think Shanghai Bairun Investment Holding Group's price-to-earnings (or "P/E") ratio of 31x is worth a mention when the median P/E in China is similar at about 33x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

With earnings growth that's superior to most other companies of late, Shanghai Bairun Investment Holding Group has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Check out our latest analysis for Shanghai Bairun Investment Holding Group

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

Is There Some Growth For Shanghai Bairun Investment Holding Group?

In order to justify its P/E ratio, Shanghai Bairun Investment Holding Group would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 29% gain to the company's bottom line. The latest three year period has also seen an excellent 30% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 16% per year during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to expand by 26% per annum, which is noticeably more attractive.

With this information, we find it interesting that Shanghai Bairun Investment Holding Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Shanghai Bairun Investment Holding Group's P/E

Its shares have lifted substantially and now Shanghai Bairun Investment Holding Group's P/E is also back up to the market median. 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.

Our examination of Shanghai Bairun Investment Holding Group's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 2 warning signs for Shanghai Bairun Investment Holding Group (1 doesn't sit too well with us!) that you need to take into consideration.

You might be able to find a better investment than Shanghai Bairun Investment Holding Group. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.