Shanghai Chengtou Holding Co.,Ltd (SHSE:600649) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Shanghai Chengtou Holding Co.,Ltd (SHSE:600649) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Shanghai Chengtou HoldingLtd's P/E ratio of 32.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Earnings have risen at a steady rate over the last year for Shanghai Chengtou HoldingLtd, which is generally not a bad outcome. One possibility is that the P/E is moderate because investors think this good earnings growth might only be parallel to the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Shanghai Chengtou HoldingLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Chengtou HoldingLtd will help you shine a light on its historical performance.

How Is Shanghai Chengtou HoldingLtd's Growth Trending?

In order to justify its P/E ratio, Shanghai Chengtou HoldingLtd would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 7.3%. However, this wasn't enough as the latest three year period has seen an unpleasant 59% overall drop in EPS. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Shanghai Chengtou HoldingLtd is trading at a fairly similar P/E to 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 on the share price eventually.

What We Can Learn From Shanghai Chengtou HoldingLtd's P/E?

Shanghai Chengtou HoldingLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Chengtou HoldingLtd currently trades on a 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 moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Shanghai Chengtou HoldingLtd (2 are potentially serious) you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.