Anhui Huaertai Chemical Co., Ltd. (SZSE:001217) Shares Fly 27% But Investors Aren't Buying For Growth

Despite an already strong run, Anhui Huaertai Chemical Co., Ltd. (SZSE:001217) shares have been powering on, with a gain of 27% in the last thirty days. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Although its price has surged higher, Anhui Huaertai Chemical's price-to-earnings (or "P/E") ratio of 31.8x 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 37x and even P/E's above 73x 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 limited.

For example, consider that Anhui Huaertai Chemical's financial performance has been pretty ordinary lately as earnings growth is non-existent. It might be that many expect the uninspiring earnings performance to worsen, 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.

See our latest analysis for Anhui Huaertai Chemical

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Is There Any Growth For Anhui Huaertai Chemical?

There's an inherent assumption that a company should underperform the market for P/E ratios like Anhui Huaertai Chemical's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 69% overall from three years ago. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Anhui Huaertai Chemical's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Anhui Huaertai Chemical's P/E

The latest share price surge wasn't enough to lift Anhui Huaertai Chemical's P/E close to the market median. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Anhui Huaertai Chemical maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Anhui Huaertai Chemical (including 1 which is concerning).

Of course, you might also be able to find a better stock than Anhui Huaertai Chemical. 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.