Shanghai Smith Adhesive New Material Co.,Ltd (SHSE:603683) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

The Shanghai Smith Adhesive New Material Co.,Ltd (SHSE:603683) share price has done very well over the last month, posting an excellent gain of 29%. The last 30 days bring the annual gain to a very sharp 49%.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Shanghai Smith Adhesive New MaterialLtd's P/E ratio of 38.9x, since the median price-to-earnings (or "P/E") ratio in China is also close to 37x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's exceedingly strong of late, Shanghai Smith Adhesive New MaterialLtd has been doing very well. 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 Shanghai Smith Adhesive New MaterialLtd

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 Shanghai Smith Adhesive New MaterialLtd's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

Shanghai Smith Adhesive New MaterialLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered an exceptional 64% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 54% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shanghai Smith Adhesive New MaterialLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Bottom Line On Shanghai Smith Adhesive New MaterialLtd's P/E

Shanghai Smith Adhesive New MaterialLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Shanghai Smith Adhesive New MaterialLtd revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Shanghai Smith Adhesive New MaterialLtd that we have uncovered.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.