There's Reason For Concern Over Zhejiang Runyang New Material Technology Co., Ltd.'s (SZSE:300920) Price

There wouldn't be many who think Zhejiang Runyang New Material Technology Co., Ltd.'s (SZSE:300920) price-to-earnings (or "P/E") ratio of 29.3x is worth a mention when the median P/E in China is similar at about 29x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

Zhejiang Runyang New Material Technology certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Zhejiang Runyang New Material Technology

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 Zhejiang Runyang New Material Technology's earnings, revenue and cash flow.

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

The only time you'd be comfortable seeing a P/E like Zhejiang Runyang New Material Technology's is when the company's growth is tracking the market closely.

Taking a look back first, we see that the company grew earnings per share by an impressive 222% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 63% drop in EPS in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Zhejiang Runyang New Material Technology's P/E sits in line with 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.

The Bottom Line On Zhejiang Runyang New Material Technology's P/E

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 P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Zhejiang Runyang New Material Technology (1 doesn't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Zhejiang Runyang New Material Technology's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.