There's Reason For Concern Over Weihai Guangwei Composites Co., Ltd.'s (SZSE:300699) Massive 37% Price Jump

Weihai Guangwei Composites Co., Ltd. (SZSE:300699) shareholders have had their patience rewarded with a 37% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 35%.

After such a large jump in price, Weihai Guangwei Composites may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The recently shrinking earnings for Weihai Guangwei Composites have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Weihai Guangwei Composites

Keen to find out how analysts think Weihai Guangwei Composites' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Weihai Guangwei Composites' to be considered reasonable.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.6%. Regardless, EPS has managed to lift by a handy 15% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Looking ahead now, EPS is anticipated to climb by 15% per annum during the coming three years according to the eight analysts following the company. With the market predicted to deliver 19% growth per annum, the company is positioned for a weaker earnings result.

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

The Bottom Line On Weihai Guangwei Composites' P/E

The large bounce in Weihai Guangwei Composites' shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Weihai Guangwei Composites' analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Weihai Guangwei Composites (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, you might also be able to find a better stock than Weihai Guangwei Composites. 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.