What Argus (Shanghai) Textile Chemicals Co.,Ltd.'s (SHSE:603790) 31% Share Price Gain Is Not Telling You

Argus (Shanghai) Textile Chemicals Co.,Ltd. (SHSE:603790) shareholders have had their patience rewarded with a 31% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Argus (Shanghai) Textile ChemicalsLtd as a stock to potentially avoid with its 42.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Argus (Shanghai) Textile ChemicalsLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Argus (Shanghai) Textile ChemicalsLtd

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 Argus (Shanghai) Textile ChemicalsLtd's earnings, revenue and cash flow.

How Is Argus (Shanghai) Textile ChemicalsLtd's Growth Trending?

Argus (Shanghai) Textile ChemicalsLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 40% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 17% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's an unpleasant look.

In light of this, it's alarming that Argus (Shanghai) Textile ChemicalsLtd's P/E sits above the majority of other companies. 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 heavily on the share price eventually.

The Bottom Line On Argus (Shanghai) Textile ChemicalsLtd's P/E

The large bounce in Argus (Shanghai) Textile ChemicalsLtd's shares has lifted the company's P/E to a fairly high level. 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 Argus (Shanghai) Textile ChemicalsLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Argus (Shanghai) Textile ChemicalsLtd is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

Of course, you might also be able to find a better stock than Argus (Shanghai) Textile ChemicalsLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.