Earnings Tell The Story For Shanghai Runda Medical Technology Co., Ltd. (SHSE:603108) As Its Stock Soars 39%

Despite an already strong run, Shanghai Runda Medical Technology Co., Ltd. (SHSE:603108) shares have been powering on, with a gain of 39% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

Since its price has surged higher, Shanghai Runda Medical Technology's price-to-earnings (or "P/E") ratio of 61.3x 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.

With earnings that are retreating more than the market's of late, Shanghai Runda Medical Technology 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shanghai Runda Medical Technology

Keen to find out how analysts think Shanghai Runda Medical Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Shanghai Runda Medical Technology?

Shanghai Runda Medical Technology's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 57%. This means it has also seen a slide in earnings over the longer-term as EPS is down 57% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 265% over the next year. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

In light of this, it's understandable that Shanghai Runda Medical Technology's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

The strong share price surge has got Shanghai Runda Medical Technology's P/E rushing to great heights as well. 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 Runda Medical Technology maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Shanghai Runda Medical Technology (1 is significant!) that we have uncovered.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.