There's Reason For Concern Over Shenzhen Easttop Supply Chain Management Co., Ltd.'s (SZSE:002889) Massive 26% Price Jump

Shenzhen Easttop Supply Chain Management Co., Ltd. (SZSE:002889) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Shenzhen Easttop Supply Chain Management's price-to-earnings (or "P/E") ratio of 36x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 35x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Shenzhen Easttop Supply Chain Management has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is moderate because investors think this respectable earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

View our latest analysis for Shenzhen Easttop Supply Chain Management

Although there are no analyst estimates available for Shenzhen Easttop Supply Chain Management, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Shenzhen Easttop Supply Chain Management's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 18% last year. Still, incredibly EPS has fallen 20% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shenzhen Easttop Supply Chain Management is trading at a fairly similar P/E to the market. 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 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.

What We Can Learn From Shenzhen Easttop Supply Chain Management's P/E?

Its shares have lifted substantially and now Shenzhen Easttop Supply Chain Management's P/E is also back up to the market median. 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 Shenzhen Easttop Supply Chain Management revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Shenzhen Easttop Supply Chain Management, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Shenzhen Easttop Supply Chain Management, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.