Tibet GaoZheng Explosive Co., Ltd.'s (SZSE:002827) 82% Price Boost Is Out Of Tune With Earnings

The Tibet GaoZheng Explosive Co., Ltd. (SZSE:002827) share price has done very well over the last month, posting an excellent gain of 82%. The annual gain comes to 110% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Tibet GaoZheng Explosive as a stock to avoid entirely with its 68x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Tibet GaoZheng Explosive as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Tibet GaoZheng Explosive

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tibet GaoZheng Explosive's earnings, revenue and cash flow.

Is There Enough Growth For Tibet GaoZheng Explosive?

In order to justify its P/E ratio, Tibet GaoZheng Explosive would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 82% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 105% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Tibet GaoZheng Explosive's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has got Tibet GaoZheng Explosive'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.

Our examination of Tibet GaoZheng Explosive revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Tibet GaoZheng Explosive you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.