Optimistic Investors Push Chaozhou Three-Circle (Group) Co.,Ltd. (SZSE:300408) Shares Up 37% But Growth Is Lacking

Chaozhou Three-Circle (Group) Co.,Ltd. (SZSE:300408) shareholders have had their patience rewarded with a 37% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider Chaozhou Three-Circle (Group)Ltd as a stock to potentially avoid with its 41.8x 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 Chaozhou Three-Circle (Group)Ltd as its earnings have risen in spite of the market's earnings going into reverse. 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 Chaozhou Three-Circle (Group)Ltd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chaozhou Three-Circle (Group)Ltd.

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

In order to justify its P/E ratio, Chaozhou Three-Circle (Group)Ltd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 44% gain to the company's bottom line. Still, incredibly EPS has fallen 10% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the eight analysts covering the company suggest earnings should grow by 19% per annum over the next three years. With the market predicted to deliver 19% growth per annum, the company is positioned for a comparable earnings result.

In light of this, it's curious that Chaozhou Three-Circle (Group)Ltd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

What We Can Learn From Chaozhou Three-Circle (Group)Ltd's P/E?

Chaozhou Three-Circle (Group)Ltd'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 Chaozhou Three-Circle (Group)Ltd's analyst forecasts revealed that its market-matching earnings outlook isn't impacting its high P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Chaozhou Three-Circle (Group)Ltd you should know about.

Of course, you might also be able to find a better stock than Chaozhou Three-Circle (Group)Ltd. 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.