Investors Still Aren't Entirely Convinced By Suzhou Shihua New Material Technology Co., Ltd.'s (SHSE:688093) Earnings Despite 32% Price Jump

Suzhou Shihua New Material Technology Co., Ltd. (SHSE:688093) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Notwithstanding the latest gain, the annual share price return of 6.4% isn't as impressive.

Even after such a large jump in price, Suzhou Shihua New Material Technology's price-to-earnings (or "P/E") ratio of 22.8x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 62x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Suzhou Shihua New Material Technology as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. 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 out of favour.

Check out our latest analysis for Suzhou Shihua New Material Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Suzhou Shihua New Material Technology.

How Is Suzhou Shihua New Material Technology's Growth Trending?

Suzhou Shihua New Material Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Still, the latest three year period was better as it's delivered a decent 15% overall rise in EPS. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 18% per year, which is noticeably less attractive.

In light of this, it's peculiar that Suzhou Shihua New Material Technology's P/E sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Suzhou Shihua New Material Technology's P/E?

Suzhou Shihua New Material Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

We've established that Suzhou Shihua New Material Technology currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Suzhou Shihua New Material Technology (at least 1 which is potentially serious), and understanding these should be part of your investment process.

You might be able to find a better investment than Suzhou Shihua New Material Technology. 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.