Optimistic Investors Push Dongguan Golden Sun Abrasives Co.,Ltd (SZSE:300606) Shares Up 37% But Growth Is Lacking

The Dongguan Golden Sun Abrasives Co.,Ltd (SZSE:300606) share price has done very well over the last month, posting an excellent gain of 37%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

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 31x, you may consider Dongguan Golden Sun AbrasivesLtd as a stock to avoid entirely with its 53.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Dongguan Golden Sun AbrasivesLtd has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Dongguan Golden Sun AbrasivesLtd

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 Dongguan Golden Sun AbrasivesLtd's earnings, revenue and cash flow.

Is There Enough Growth For Dongguan Golden Sun AbrasivesLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Dongguan Golden Sun AbrasivesLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 180%. The latest three year period has also seen an excellent 76% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Dongguan Golden Sun AbrasivesLtd'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 Final Word

Shares in Dongguan Golden Sun AbrasivesLtd have built up some good momentum lately, which has really inflated its P/E. 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 Dongguan Golden Sun AbrasivesLtd currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Dongguan Golden Sun AbrasivesLtd (3 are a bit unpleasant) you should be aware of.

You might be able to find a better investment than Dongguan Golden Sun AbrasivesLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.