Investors Appear Satisfied With Petpal Pet Nutrition Technology Co., Ltd.'s (SZSE:300673) Prospects As Shares Rocket 31%

Petpal Pet Nutrition Technology Co., Ltd. (SZSE:300673) shares have had a really impressive month, gaining 31% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Petpal Pet Nutrition Technology as a stock to avoid entirely with its 52.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent earnings growth for Petpal Pet Nutrition Technology has been in line with the market. One possibility is that the P/E is high because investors think this modest earnings performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Petpal Pet Nutrition Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Petpal Pet Nutrition Technology.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Petpal Pet Nutrition Technology would need to produce outstanding growth well in excess of the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 43% drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 58% per annum during the coming three years according to the twelve analysts following the company. With the market only predicted to deliver 21% per annum, the company is positioned for a stronger earnings result.

With this information, we can see why Petpal Pet Nutrition Technology is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Petpal Pet Nutrition Technology's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Petpal Pet Nutrition Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Petpal Pet Nutrition Technology with six simple checks.

If these risks are making you reconsider your opinion on Petpal Pet Nutrition Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.