Wangsu Science & Technology Co.,Ltd.'s (SZSE:300017) Shares Climb 37% But Its Business Is Yet to Catch Up

Wangsu Science & Technology Co.,Ltd. (SZSE:300017) shares have had a really impressive month, gaining 37% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 41%.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Wangsu Science & TechnologyLtd as a stock to potentially avoid with its 48x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times have been pleasing for Wangsu Science & TechnologyLtd as its earnings have risen in spite of the market's earnings going into reverse. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Wangsu Science & TechnologyLtd

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

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

There's an inherent assumption that a company should outperform the market for P/E ratios like Wangsu Science & TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 35% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 306% 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.

Turning to the outlook, the next year should generate growth of 15% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's alarming that Wangsu Science & TechnologyLtd's P/E sits above the majority of other companies. 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 Key Takeaway

Wangsu Science & TechnologyLtd's P/E is getting right up there since its shares have risen strongly. 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 Wangsu Science & TechnologyLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Wangsu Science & TechnologyLtd (including 1 which is a bit unpleasant).

You might be able to find a better investment than Wangsu Science & TechnologyLtd. 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).

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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.