Why Investors Shouldn't Be Surprised By Zhejiang Sanmei Chemical Industry Co.,Ltd.'s (SHSE:603379) P/E

Zhejiang Sanmei Chemical Industry Co.,Ltd.'s (SHSE:603379) price-to-earnings (or "P/E") ratio of 58.3x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Zhejiang Sanmei Chemical IndustryLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Zhejiang Sanmei Chemical IndustryLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang Sanmei Chemical IndustryLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 38% gain to the company's bottom line. Pleasingly, EPS has also lifted 126% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 41% each year during the coming three years according to the five analysts following the company. With the market only predicted to deliver 25% per year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Zhejiang Sanmei Chemical IndustryLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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.

It is also worth noting that we have found 1 warning sign for Zhejiang Sanmei Chemical IndustryLtd that you need to take into consideration.

If these risks are making you reconsider your opinion on Zhejiang Sanmei Chemical IndustryLtd, 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.