There's No Escaping Suzhou Shihua New Material Technology Co., Ltd.'s (SHSE:688093) Muted Earnings Despite A 28% Share Price Rise

Suzhou Shihua New Material Technology Co., Ltd. (SHSE:688093) shareholders have had their patience rewarded with a 28% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 62%.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 38x, you may still consider Suzhou Shihua New Material Technology as an attractive investment with its 27.4x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Suzhou Shihua New Material Technology has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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

Want the full picture on analyst estimates for the company? Then our free report on Suzhou Shihua New Material Technology will help you uncover what's on the horizon.

Does Growth Match The Low P/E?

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 a decent 13% gain to the company's bottom line. EPS has also lifted 24% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 29% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a weaker earnings result.

With this information, we can see why Suzhou Shihua New Material Technology is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Despite Suzhou Shihua New Material Technology's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Suzhou Shihua New Material Technology's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Suzhou Shihua New Material Technology (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of Suzhou Shihua New Material Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.