Why Investors Shouldn't Be Surprised By Chongyi Zhangyuan Tungsten Co., Ltd.'s (SZSE:002378) 25% Share Price Surge

Those holding Chongyi Zhangyuan Tungsten Co., Ltd. (SZSE:002378) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 29x, you may consider Chongyi Zhangyuan Tungsten as a stock to potentially avoid with its 39.9x 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 Chongyi Zhangyuan Tungsten as its earnings have been falling quicker 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. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Chongyi Zhangyuan Tungsten

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chongyi Zhangyuan Tungsten.

Is There Enough Growth For Chongyi Zhangyuan Tungsten?

There's an inherent assumption that a company should outperform the market for P/E ratios like Chongyi Zhangyuan Tungsten's to be considered reasonable.

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 29%. Still, the latest three year period has seen an excellent 298% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 92% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

In light of this, it's understandable that Chongyi Zhangyuan Tungsten's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Chongyi Zhangyuan Tungsten's P/E

The large bounce in Chongyi Zhangyuan Tungsten's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Chongyi Zhangyuan Tungsten maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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 3 warning signs for Chongyi Zhangyuan Tungsten (of which 1 is a bit unpleasant!) you should know about.

Of course, you might also be able to find a better stock than Chongyi Zhangyuan Tungsten. 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.