Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) Looks Just Right With A 29% Price Jump

Despite an already strong run, Shanghai Zhongzhou Special Alloy Materials Co., Ltd. (SZSE:300963) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 69%.

Following the firm bounce in price, Shanghai Zhongzhou Special Alloy Materials' price-to-earnings (or "P/E") ratio of 50.2x might make it look like a 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 as high as it is.

With earnings that are retreating more than the market's of late, Shanghai Zhongzhou Special Alloy Materials has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Shanghai Zhongzhou Special Alloy Materials

Keen to find out how analysts think Shanghai Zhongzhou Special Alloy Materials' future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as Shanghai Zhongzhou Special Alloy Materials' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 57% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 72% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

With this information, we can see why Shanghai Zhongzhou Special Alloy Materials is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shanghai Zhongzhou Special Alloy Materials' P/E is getting right up there since its shares have risen strongly. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Shanghai Zhongzhou Special Alloy Materials maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Shanghai Zhongzhou Special Alloy Materials is showing 2 warning signs in our investment analysis, and 1 of those is concerning.

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.