Earnings Not Telling The Story For Hunan Heshun Petroleum Co.,Ltd. (SHSE:603353) After Shares Rise 32%

Despite an already strong run, Hunan Heshun Petroleum Co.,Ltd. (SHSE:603353) shares have been powering on, with a gain of 32% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 35% in the last twelve months.

Since its price has surged higher, Hunan Heshun PetroleumLtd's price-to-earnings (or "P/E") ratio of 73.7x 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 36x and even P/E's below 21x 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.

For example, consider that Hunan Heshun PetroleumLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Hunan Heshun PetroleumLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hunan Heshun PetroleumLtd's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

Hunan Heshun PetroleumLtd'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.

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 40%. This means it has also seen a slide in earnings over the longer-term as EPS is down 70% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's an unpleasant look.

In light of this, it's alarming that Hunan Heshun PetroleumLtd's P/E sits above the majority of other companies. 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 heavily on the share price eventually.

The Final Word

Hunan Heshun PetroleumLtd's P/E is flying high just like its stock has during the last month. 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.

We've established that Hunan Heshun PetroleumLtd currently trades on a much 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 high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 1 warning sign for Hunan Heshun PetroleumLtd that we have uncovered.

You might be able to find a better investment than Hunan Heshun PetroleumLtd. 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).

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.