Shanghai New Centurion Network Information Technology Co., Ltd.'s (SHSE:605398) Shares Climb 28% But Its Business Is Yet to Catch Up

Shanghai New Centurion Network Information Technology Co., Ltd. (SHSE:605398) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 39%.

Since its price has surged higher, Shanghai New Centurion Network Information Technology's price-to-earnings (or "P/E") ratio of 79.7x 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 34x and even P/E's below 19x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

For instance, Shanghai New Centurion Network Information Technology'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. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Shanghai New Centurion Network Information Technology

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

How Is Shanghai New Centurion Network Information Technology's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shanghai New Centurion Network Information Technology's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.8%. This means it has also seen a slide in earnings over the longer-term as EPS is down 47% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

With this information, we find it concerning that Shanghai New Centurion Network Information Technology is trading at a P/E higher than 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. 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.

The Bottom Line On Shanghai New Centurion Network Information Technology's P/E

Shares in Shanghai New Centurion Network Information Technology have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shanghai New Centurion Network Information Technology 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.

Before you settle on your opinion, we've discovered 2 warning signs for Shanghai New Centurion Network Information Technology that you should be aware of.

Of course, you might also be able to find a better stock than Shanghai New Centurion Network Information Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.