After Leaping 28% Zhejiang Sanmei Chemical Industry Co.,Ltd. (SHSE:603379) Shares Are Not Flying Under The Radar

Zhejiang Sanmei Chemical Industry Co.,Ltd. (SHSE:603379) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 31%.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Zhejiang Sanmei Chemical IndustryLtd as a stock to potentially avoid with its 42.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times have been pleasing for Zhejiang Sanmei Chemical IndustryLtd 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.

See our latest analysis for Zhejiang Sanmei Chemical IndustryLtd

Keen to find out how analysts think Zhejiang Sanmei Chemical IndustryLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Zhejiang Sanmei Chemical IndustryLtd?

In order to justify its P/E ratio, Zhejiang Sanmei Chemical IndustryLtd would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 131%. The latest three year period has also seen an excellent 141% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 60% over the next year. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we can see why Zhejiang Sanmei Chemical IndustryLtd 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

The large bounce in Zhejiang Sanmei Chemical IndustryLtd's shares has lifted the company's P/E to a fairly high level. 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 Zhejiang Sanmei Chemical IndustryLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Zhejiang Sanmei Chemical IndustryLtd you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.