Optimistic Investors Push Dencare (Chongqing) Oral Care Co., Ltd. (SZSE:001328) Shares Up 27% But Growth Is Lacking

Despite an already strong run, Dencare (Chongqing) Oral Care Co., Ltd. (SZSE:001328) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 39x, you may consider Dencare (Chongqing) Oral Care as a stock to potentially avoid with its 48.1x 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.

Dencare (Chongqing) Oral Care's negative earnings growth of late has neither been better nor worse than most other companies. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Dencare (Chongqing) Oral Care

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dencare (Chongqing) Oral Care.

Is There Enough Growth For Dencare (Chongqing) Oral Care?

Dencare (Chongqing) Oral Care'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 2.1% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 4.3% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 19% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

In light of this, it's alarming that Dencare (Chongqing) Oral Care's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

Dencare (Chongqing) Oral Care's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Dencare (Chongqing) Oral Care's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near 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 high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Dencare (Chongqing) Oral Care 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.