Pinning Down Ningbo Runhe High-Tech Materials Co., Ltd.'s (SZSE:300727) P/E Is Difficult Right Now

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 28x, you may consider Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) as a stock to potentially avoid with its 34x 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 as high as it is.

Ningbo Runhe High-Tech Materials certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. 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 Ningbo Runhe High-Tech Materials

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ningbo Runhe High-Tech Materials.

How Is Ningbo Runhe High-Tech Materials' Growth Trending?

In order to justify its P/E ratio, Ningbo Runhe High-Tech Materials would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a decent 6.2% gain to the company's bottom line. EPS has also lifted 17% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 31% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's alarming that Ningbo Runhe High-Tech Materials' 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 Key Takeaway

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 Ningbo Runhe High-Tech Materials currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Ningbo Runhe High-Tech Materials that you should be aware of.

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.