Jinsanjiang (Zhaoqing) Silicon Material Company Limited's (SZSE:301059) 39% Price Boost Is Out Of Tune With Earnings

The Jinsanjiang (Zhaoqing) Silicon Material Company Limited (SZSE:301059) share price has done very well over the last month, posting an excellent gain of 39%. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Following the firm bounce in price, Jinsanjiang (Zhaoqing) Silicon Material's price-to-earnings (or "P/E") ratio of 54.9x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 33x and even P/E's below 19x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

The earnings growth achieved at Jinsanjiang (Zhaoqing) Silicon Material over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material

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 Jinsanjiang (Zhaoqing) Silicon Material's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/E as steep as Jinsanjiang (Zhaoqing) Silicon Material's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 8.2% gain to the company's bottom line. Still, lamentably EPS has fallen 37% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that Jinsanjiang (Zhaoqing) Silicon Material is trading at a P/E higher than the market. 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 heavily on the share price eventually.

The Bottom Line On Jinsanjiang (Zhaoqing) Silicon Material's P/E

Shares in Jinsanjiang (Zhaoqing) Silicon Material have built up some good momentum lately, which has really inflated its P/E. 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 Jinsanjiang (Zhaoqing) Silicon Material currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Jinsanjiang (Zhaoqing) Silicon Material (1 is potentially serious) you should be aware of.

You might be able to find a better investment than Jinsanjiang (Zhaoqing) Silicon Material. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.