Shanghai Hajime Advanced Material Technology Co., Ltd.'s (SZSE:301000) Shares Climb 32% But Its Business Is Yet to Catch Up

Despite an already strong run, Shanghai Hajime Advanced Material Technology Co., Ltd. (SZSE:301000) shares have been powering on, with a gain of 32% in the last thirty days. The last month tops off a massive increase of 278% in the last year.

Since its price has surged higher, Shanghai Hajime Advanced Material Technology may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.8x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shanghai Hajime Advanced Material Technology has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Shanghai Hajime Advanced Material Technology

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shanghai Hajime Advanced Material Technology.

Is There Enough Growth For Shanghai Hajime Advanced Material Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai Hajime Advanced Material Technology's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 56% last year. Still, incredibly EPS has fallen 3.9% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 34% over the next year. With the market predicted to deliver 37% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Shanghai Hajime Advanced Material Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Shanghai Hajime Advanced Material Technology's P/E

Shanghai Hajime Advanced Material Technology's P/E is flying high just like its stock has during the last month. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shanghai Hajime Advanced Material Technology currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Shanghai Hajime Advanced Material Technology 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.