Sichuan Guoguang Agrochemical Co., Ltd. (SZSE:002749) Stocks Shoot Up 30% But Its P/E Still Looks Reasonable

Sichuan Guoguang Agrochemical Co., Ltd. (SZSE:002749) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 83% in the last year.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 30x, you may consider Sichuan Guoguang Agrochemical as a stock to potentially avoid with its 42.1x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Sichuan Guoguang Agrochemical has been very sluggish. 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 Sichuan Guoguang Agrochemical

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

Is There Enough Growth For Sichuan Guoguang Agrochemical?

Sichuan Guoguang Agrochemical's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 22% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 105% over the next year. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

With this information, we can see why Sichuan Guoguang Agrochemical is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The large bounce in Sichuan Guoguang Agrochemical'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 Sichuan Guoguang Agrochemical maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Sichuan Guoguang Agrochemical that you need to be mindful of.

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