With a price-to-earnings (or "P/E") ratio of 39.8x Shandong Kaisheng New Materials Co.,Ltd. (SZSE:301069) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Shandong Kaisheng New MaterialsLtd has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
See our latest analysis for Shandong Kaisheng New MaterialsLtd
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Shandong Kaisheng New MaterialsLtd's is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 25% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 17% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 91% over the next year. With the market only predicted to deliver 43%, the company is positioned for a stronger earnings result.
With this information, we can see why Shandong Kaisheng New MaterialsLtd is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Shandong Kaisheng New MaterialsLtd's P/E?
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.
We've established that Shandong Kaisheng New MaterialsLtd maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Shandong Kaisheng New MaterialsLtd (at least 1 which doesn't sit too well with us), and understanding them should be part of your investment process.
If these risks are making you reconsider your opinion on Shandong Kaisheng New MaterialsLtd, 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.