Liuzhou Chemical Industry Co., Ltd.'s (SHSE:600423) Shares Climb 36% But Its Business Is Yet to Catch Up

Despite an already strong run, Liuzhou Chemical Industry Co., Ltd. (SHSE:600423) shares have been powering on, with a gain of 36% in the last thirty days. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, it's still not a stretch to say that Liuzhou Chemical Industry's price-to-earnings (or "P/E") ratio of 36.7x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 34x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Recent times have been quite advantageous for Liuzhou Chemical Industry as its earnings have been rising very briskly. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. 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.

See our latest analysis for Liuzhou Chemical Industry

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Liuzhou Chemical Industry's earnings, revenue and cash flow.

Is There Some Growth For Liuzhou Chemical Industry?

The only time you'd be comfortable seeing a P/E like Liuzhou Chemical Industry's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 383% last year. The strong recent performance means it was also able to grow EPS by 134% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Liuzhou Chemical Industry's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Liuzhou Chemical Industry appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Liuzhou Chemical Industry revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Liuzhou Chemical Industry that you should be aware of.

You might be able to find a better investment than Liuzhou Chemical Industry. 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.