Shenglan Technology Co., Ltd.'s (SZSE:300843) 90% Price Boost Is Out Of Tune With Earnings

Shenglan Technology Co., Ltd. (SZSE:300843) shares have continued their recent momentum with a 90% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 79% in the last year.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 32x, you may consider Shenglan Technology as a stock to avoid entirely with its 67x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for Shenglan Technology as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Shenglan 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 Shenglan Technology's earnings, revenue and cash flow.

How Is Shenglan Technology's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Shenglan Technology's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 43% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 36% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

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

The Bottom Line On Shenglan Technology's P/E

Shenglan Technology's P/E is flying high just like its stock has during the last month. 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.

We've established that Shenglan Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term 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 2 warning signs for Shenglan Technology you should know about.

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.