China Sanjiang Fine Chemicals Company Limited (HKG:2198) Stock Catapults 37% Though Its Price And Business Still Lag The Market

Despite an already strong run, China Sanjiang Fine Chemicals Company Limited (HKG:2198) shares have been powering on, with a gain of 37% in the last thirty days. The last 30 days bring the annual gain to a very sharp 73%.

In spite of the firm bounce in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 13x, you may still consider China Sanjiang Fine Chemicals as a highly attractive investment with its 4.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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With earnings growth that's exceedingly strong of late, China Sanjiang Fine Chemicals has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for China Sanjiang Fine Chemicals

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on China Sanjiang Fine Chemicals will help you shine a light on its historical performance.

Is There Any Growth For China Sanjiang Fine Chemicals?

There's an inherent assumption that a company should far underperform the market for P/E ratios like China Sanjiang Fine Chemicals' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 210% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that China Sanjiang Fine Chemicals' P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

China Sanjiang Fine Chemicals' recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of China Sanjiang Fine Chemicals revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 2 warning signs for China Sanjiang Fine Chemicals you should be aware of.

If you're unsure about the strength of China Sanjiang Fine Chemicals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.