Earnings Tell The Story For Shaanxi Sirui Advanced Materials Co., Ltd. (SHSE:688102) As Its Stock Soars 26%

Shaanxi Sirui Advanced Materials Co., Ltd. (SHSE:688102) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 10% is also fairly reasonable.

Following the firm bounce in price, Shaanxi Sirui Advanced Materials' price-to-earnings (or "P/E") ratio of 70.4x 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 31x and even P/E's below 19x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for Shaanxi Sirui Advanced Materials as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shaanxi Sirui Advanced Materials

Want the full picture on analyst estimates for the company? Then our free report on Shaanxi Sirui Advanced Materials will help you uncover what's on the horizon.

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

Shaanxi Sirui Advanced Materials' P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 49%. The strong recent performance means it was also able to grow EPS by 64% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 33% each year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 25% each year growth forecast for the broader market.

With this information, we can see why Shaanxi Sirui Advanced Materials is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shaanxi Sirui Advanced Materials' P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of Shaanxi Sirui Advanced Materials' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Shaanxi Sirui Advanced Materials you should know about.

You might be able to find a better investment than Shaanxi Sirui Advanced Materials. 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.