Shanghai Haoyuan Chemexpress Co., Ltd.'s (SHSE:688131) Shares Climb 36% But Its Business Is Yet to Catch Up

Shanghai Haoyuan Chemexpress Co., Ltd. (SHSE:688131) shares have continued their recent momentum with a 36% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.4% in the last twelve months.

Since its price has surged higher, Shanghai Haoyuan Chemexpress' price-to-earnings (or "P/E") ratio of 62.8x 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 34x and even P/E's below 20x 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 so lofty.

The recently shrinking earnings for Shanghai Haoyuan Chemexpress have been in line with the market. One possibility is that the P/E is high because investors think the company can turn things around and break free from the broader downward trend in earnings. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Shanghai Haoyuan Chemexpress

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

Is There Enough Growth For Shanghai Haoyuan Chemexpress?

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

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 1.9%. As a result, earnings from three years ago have also fallen 40% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 38% as estimated by the four analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is not materially different.

With this information, we find it interesting that Shanghai Haoyuan Chemexpress is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Final Word

The strong share price surge has got Shanghai Haoyuan Chemexpress' P/E rushing to great heights as well. 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 Shanghai Haoyuan Chemexpress' analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Shanghai Haoyuan Chemexpress that you should be aware of.

You might be able to find a better investment than Shanghai Haoyuan Chemexpress. 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.