Why Investors Shouldn't Be Surprised By Sunresin New Materials Co.,Ltd's (SZSE:300487) 41% Share Price Surge

The Sunresin New Materials Co.,Ltd (SZSE:300487) share price has done very well over the last month, posting an excellent gain of 41%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.9% over the last year.

Following the firm bounce in price, Sunresin New MaterialsLtd's price-to-earnings (or "P/E") ratio of 36.9x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Sunresin New MaterialsLtd as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Sunresin New MaterialsLtd

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Does Growth Match The High P/E?

In order to justify its P/E ratio, Sunresin New MaterialsLtd would need to produce impressive growth in excess of the market.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. This was backed up an excellent period prior to see EPS up by 213% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 22% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per annum, which is noticeably less attractive.

In light of this, it's understandable that Sunresin New MaterialsLtd'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 Key Takeaway

Sunresin New MaterialsLtd's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Sunresin New MaterialsLtd 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.

Having said that, be aware Sunresin New MaterialsLtd is showing 2 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.