Wangsu Science & Technology Co.,Ltd.'s (SZSE:300017) 30% Share Price Surge Not Quite Adding Up

Wangsu Science & Technology Co.,Ltd. (SZSE:300017) shareholders would be excited to see that the share price has had a great month, posting a 30% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 40%.

After such a large jump in price, Wangsu Science & TechnologyLtd's price-to-earnings (or "P/E") ratio of 34.8x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Wangsu Science & TechnologyLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Wangsu Science & TechnologyLtd

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How Is Wangsu Science & TechnologyLtd's Growth Trending?

In order to justify its P/E ratio, Wangsu Science & TechnologyLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 74% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 390% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 9.6% each year over the next three years. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

With this information, we find it concerning that Wangsu Science & TechnologyLtd is trading at a P/E higher than the market. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Wangsu Science & TechnologyLtd's P/E

Wangsu Science & TechnologyLtd's P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Wangsu Science & TechnologyLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Wangsu Science & TechnologyLtd you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.