There's Reason For Concern Over Yantai China Pet Foods Co., Ltd.'s (SZSE:002891) Massive 28% Price Jump

Despite an already strong run, Yantai China Pet Foods Co., Ltd. (SZSE:002891) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 58%.

Although its price has surged higher, there still wouldn't be many who think Yantai China Pet Foods' price-to-earnings (or "P/E") ratio of 34.2x is worth a mention when the median P/E in China is similar at about 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Yantai China Pet Foods certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Yantai China Pet Foods

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

How Is Yantai China Pet Foods' Growth Trending?

In order to justify its P/E ratio, Yantai China Pet Foods would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a terrific increase of 102%. The strong recent performance means it was also able to grow EPS by 163% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 12% over the next year. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

In light of this, it's curious that Yantai China Pet Foods' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Yantai China Pet Foods' P/E

Its shares have lifted substantially and now Yantai China Pet Foods' P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Yantai China Pet Foods' 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Yantai China Pet Foods with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Yantai China Pet Foods' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.