Investors Appear Satisfied With Shenzhen Kangtai Biological Products Co., Ltd.'s (SZSE:300601) Prospects As Shares Rocket 32%

Shenzhen Kangtai Biological Products Co., Ltd. (SZSE:300601) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Shenzhen Kangtai Biological Products as a stock to potentially avoid with its 38.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen Kangtai Biological Products has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Shenzhen Kangtai Biological Products

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

Is There Enough Growth For Shenzhen Kangtai Biological Products?

The only time you'd be truly comfortable seeing a P/E as high as Shenzhen Kangtai Biological Products' is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 99%. However, this wasn't enough as the latest three year period has seen a very unpleasant 34% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 39% each year as estimated by the nine analysts watching the company. With the market only predicted to deliver 19% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Shenzhen Kangtai Biological Products' 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.

What We Can Learn From Shenzhen Kangtai Biological Products' P/E?

The large bounce in Shenzhen Kangtai Biological Products' shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Shenzhen Kangtai Biological Products' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you take the next step, you should know about the 3 warning signs for Shenzhen Kangtai Biological Products that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.