Shenyu Communication Technology Inc.'s (SZSE:300563) Shares Climb 33% But Its Business Is Yet to Catch Up

The Shenyu Communication Technology Inc. (SZSE:300563) share price has done very well over the last month, posting an excellent gain of 33%. The last 30 days bring the annual gain to a very sharp 45%.

After such a large jump in price, Shenyu Communication Technology'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. 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 quite advantageous for Shenyu Communication Technology as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, 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.

Check out our latest analysis for Shenyu Communication Technology

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Shenyu Communication Technology's earnings, revenue and cash flow.

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

In order to justify its P/E ratio, Shenyu Communication Technology would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 167% gain to the company's bottom line. The latest three year period has also seen an excellent 40% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 34% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that Shenyu Communication Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

Shenyu Communication Technology shares have received a push in the right direction, but its P/E is elevated too. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Shenyu Communication Technology revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Shenyu Communication Technology is showing 2 warning signs in our investment analysis, and 1 of those is a bit concerning.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.