Earnings Tell The Story For Anhui Truchum Advanced Materials and Technology Co., Ltd. (SZSE:002171) As Its Stock Soars 27%

Anhui Truchum Advanced Materials and Technology Co., Ltd. (SZSE:002171) shares have continued their recent momentum with a 27% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 6.0% isn't as attractive.

After such a large jump in price, Anhui Truchum Advanced Materials and Technology's price-to-earnings (or "P/E") ratio of 52.8x 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 34x and even P/E's below 20x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Anhui Truchum Advanced Materials and Technology has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Anhui Truchum Advanced Materials and Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Anhui Truchum Advanced Materials and Technology.

Is There Enough Growth For Anhui Truchum Advanced Materials and Technology?

In order to justify its P/E ratio, Anhui Truchum Advanced Materials and Technology would need to produce outstanding growth well in excess of the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. The last three years don't look nice either as the company has shrunk EPS by 58% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 248% over the next year. That's shaping up to be materially higher than the 39% growth forecast for the broader market.

In light of this, it's understandable that Anhui Truchum Advanced Materials and Technology's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The strong share price surge has got Anhui Truchum Advanced Materials and Technology's P/E rushing to great heights as well. 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.

As we suspected, our examination of Anhui Truchum Advanced Materials and Technology's 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.

Before you take the next step, you should know about the 4 warning signs for Anhui Truchum Advanced Materials and Technology (2 are significant!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.