Why Investors Shouldn't Be Surprised By Venustech Group Inc.'s (SZSE:002439) 37% Share Price Surge

Venustech Group Inc. (SZSE:002439) shares have had a really impressive month, gaining 37% 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 39% over that time.

After such a large jump in price, Venustech Group's price-to-earnings (or "P/E") ratio of 55.6x 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 33x and even P/E's below 20x are quite common. 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.

With earnings that are retreating more than the market's of late, Venustech Group has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, 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 Venustech Group

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

Does Growth Match The High P/E?

Venustech Group'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.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 70%. This means it has also seen a slide in earnings over the longer-term as EPS is down 60% 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.

Looking ahead now, EPS is anticipated to climb by 53% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we can see why Venustech Group is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in Venustech Group have built up some good momentum lately, which has really inflated its P/E. 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.

As we suspected, our examination of Venustech Group's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for Venustech Group that you need to take into consideration.

If these risks are making you reconsider your opinion on Venustech Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.