Optimistic Investors Push Shandong Ruifeng Chemical Co., Ltd. (SZSE:300243) Shares Up 48% But Growth Is Lacking

Shandong Ruifeng Chemical Co., Ltd. (SZSE:300243) shareholders have had their patience rewarded with a 48% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 38%.

After such a large jump in price, Shandong Ruifeng Chemical may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 32.9x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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.

Recent times have been quite advantageous for Shandong Ruifeng Chemical as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shandong Ruifeng Chemical

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 Ruifeng Chemical's earnings, revenue and cash flow.

How Is Shandong Ruifeng Chemical's Growth Trending?

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

Taking a look back first, we see that the company grew earnings per share by an impressive 38% last year. Still, incredibly EPS has fallen 7.9% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 35% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Shandong Ruifeng Chemical's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Shandong Ruifeng Chemical's P/E?

Shandong Ruifeng Chemical shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that Shandong Ruifeng Chemical currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 4 warning signs we've spotted with Shandong Ruifeng Chemical (including 2 which are a bit unpleasant).

Of course, you might also be able to find a better stock than Shandong Ruifeng Chemical. 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.