Guoquan Food (Shanghai) Co., Ltd. (HKG:2517) Stocks Shoot Up 48% But Its P/E Still Looks Reasonable

Despite an already strong run, Guoquan Food (Shanghai) Co., Ltd. (HKG:2517) shares have been powering on, with a gain of 48% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 39% over that time.

Since its price has surged higher, Guoquan Food (Shanghai)'s price-to-earnings (or "P/E") ratio of 34.7x might make it look like a strong sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 10x and even P/E's below 6x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

Guoquan Food (Shanghai) hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Guoquan Food (Shanghai)

Keen to find out how analysts think Guoquan Food (Shanghai)'s future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Guoquan Food (Shanghai)'s is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 5.9%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 26% per year during the coming three years according to the sole analyst following the company. With the market only predicted to deliver 15% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that Guoquan Food (Shanghai)'s P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Guoquan Food (Shanghai)'s P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Guoquan Food (Shanghai)'s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Guoquan Food (Shanghai) is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Guoquan Food (Shanghai). So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.