What Shandong Dawn Polymer Co.,Ltd.'s (SZSE:002838) 26% Share Price Gain Is Not Telling You

Shandong Dawn Polymer Co.,Ltd. (SZSE:002838) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

Following the firm bounce in price, Shandong Dawn PolymerLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 44.9x, since almost half of all companies in China have P/E ratios under 37x and even P/E's lower than 21x are not unusual. 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.

Earnings have risen firmly for Shandong Dawn PolymerLtd recently, which is pleasing to see. It might be that many expect the respectable 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 Shandong Dawn PolymerLtd

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 Shandong Dawn PolymerLtd's earnings, revenue and cash flow.

Is There Enough Growth For Shandong Dawn PolymerLtd?

The only time you'd be truly comfortable seeing a P/E as high as Shandong Dawn PolymerLtd's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a worthy increase of 9.7%. Still, lamentably EPS has fallen 42% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's alarming that Shandong Dawn PolymerLtd'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.

What We Can Learn From Shandong Dawn PolymerLtd's P/E?

Shandong Dawn PolymerLtd's P/E is getting right up there since its shares have risen strongly. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shandong Dawn PolymerLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, 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.

Having said that, be aware Shandong Dawn PolymerLtd is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Shandong Dawn PolymerLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.