Earnings Not Telling The Story For Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) After Shares Rise 27%

Despite an already strong run, Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) shares have been powering on, with a gain of 27% in the last thirty days. The last month tops off a massive increase of 107% in the last year.

Since its price has surged higher, Ningbo Runhe High-Tech Materials' price-to-earnings (or "P/E") ratio of 59.8x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 38x and even P/E's below 21x are quite common. 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.

Ningbo Runhe High-Tech Materials has been doing a good job lately as it's been growing earnings at a solid pace. 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.

View our latest analysis for Ningbo Runhe High-Tech Materials

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ningbo Runhe High-Tech Materials will help you shine a light on its historical performance.

Is There Enough Growth For Ningbo Runhe High-Tech Materials?

The only time you'd be truly comfortable seeing a P/E as steep as Ningbo Runhe High-Tech Materials' is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 13% last year. The solid recent performance means it was also able to grow EPS by 9.1% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

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 Ningbo Runhe High-Tech Materials' P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Shares in Ningbo Runhe High-Tech Materials have built up some good momentum lately, which has really inflated its P/E. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Ningbo Runhe High-Tech Materials currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, 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.

It is also worth noting that we have found 1 warning sign for Ningbo Runhe High-Tech Materials that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.