Three Squirrels Inc.'s (SZSE:300783) 32% Share Price Surge Not Quite Adding Up

Despite an already strong run, Three Squirrels Inc. (SZSE:300783) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 115% in the last year.

After such a large jump in price, Three Squirrels may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.6x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Three Squirrels as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Three Squirrels

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Three Squirrels.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Three Squirrels' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 94%. However, this wasn't enough as the latest three year period has seen a very unpleasant 18% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 25% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

With this information, we find it concerning that Three Squirrels is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Three Squirrels' P/E

Three Squirrels shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Three Squirrels currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Three Squirrels that you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.