Earnings Tell The Story For Sichuan Development Lomon Co.,Ltd. (SZSE:002312) As Its Stock Soars 25%

Sichuan Development Lomon Co.,Ltd. (SZSE:002312) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Unfortunately, despite the strong performance over the last month, the full year gain of 5.5% isn't as attractive.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 26x, you may consider Sichuan Development LomonLtd as a stock to potentially avoid with its 30.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Recent times haven't been advantageous for Sichuan Development LomonLtd as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sichuan Development LomonLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Sichuan Development LomonLtd.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Sichuan Development LomonLtd's is when the company's growth is on track to outshine 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 15%. The last three years don't look nice either as the company has shrunk EPS by 65% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 25% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

In light of this, it's understandable that Sichuan Development LomonLtd'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 Final Word

Sichuan Development LomonLtd's P/E is getting right up there since its shares have risen strongly. 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.

As we suspected, our examination of Sichuan Development LomonLtd'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. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sichuan Development LomonLtd that you should be aware of.

Of course, you might also be able to find a better stock than Sichuan Development LomonLtd. 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.