Zhangjiagang Guangda Special Material Co., Ltd. (SHSE:688186) Soars 36% But It's A Story Of Risk Vs Reward

Zhangjiagang Guangda Special Material Co., Ltd. (SHSE:688186) shareholders have had their patience rewarded with a 36% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 54% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Zhangjiagang Guangda Special Material's price-to-earnings (or "P/E") ratio of 42.6x is worth a mention when the median P/E in China is similar at about 39x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Zhangjiagang Guangda Special Material certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Zhangjiagang Guangda Special Material

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Does Growth Match The P/E?

In order to justify its P/E ratio, Zhangjiagang Guangda Special Material would need to produce growth that's similar to the market.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.8% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 42% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 166% during the coming year according to the two analysts following the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Zhangjiagang Guangda Special Material is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Its shares have lifted substantially and now Zhangjiagang Guangda Special Material's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Zhangjiagang Guangda Special Material currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Zhangjiagang Guangda Special Material.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.