Subdued Growth No Barrier To Zhejiang Runyang New Material Technology Co., Ltd. (SZSE:300920) With Shares Advancing 28%

Zhejiang Runyang New Material Technology Co., Ltd. (SZSE:300920) shares have continued their recent momentum with a 28% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.2% in the last twelve months.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Zhejiang Runyang New Material Technology as a stock to potentially avoid with its 48.9x P/E ratio. 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 quite advantageous for Zhejiang Runyang New Material Technology as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Zhejiang Runyang New Material Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Zhejiang Runyang New Material Technology will help you shine a light on its historical performance.

Is There Enough Growth For Zhejiang Runyang New Material Technology?

In order to justify its P/E ratio, Zhejiang Runyang New Material Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 31% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 64% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Zhejiang Runyang New Material Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Zhejiang Runyang New Material Technology'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.

Our examination of Zhejiang Runyang New Material Technology revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Zhejiang Runyang New Material Technology (1 is significant!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Zhejiang Runyang New Material Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.