There's Reason For Concern Over Shenzhen SDG Service Co.,Ltd.'s (SZSE:300917) Massive 52% Price Jump

Shenzhen SDG Service Co.,Ltd. (SZSE:300917) shares have had a really impressive month, gaining 52% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 52% in the last year.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may consider Shenzhen SDG ServiceLtd as a stock to avoid entirely with its 61.1x P/E ratio. 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.

For instance, Shenzhen SDG ServiceLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shenzhen SDG ServiceLtd

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

Is There Enough Growth For Shenzhen SDG ServiceLtd?

In order to justify its P/E ratio, Shenzhen SDG ServiceLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 7.8% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Shenzhen SDG ServiceLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Shenzhen SDG ServiceLtd's P/E?

Shenzhen SDG ServiceLtd's P/E is flying high just like its stock has during the last month. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Shenzhen SDG ServiceLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Shenzhen SDG ServiceLtd is showing 1 warning sign in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.