Jinsanjiang (Zhaoqing) Silicon Material Company Limited (SZSE:301059) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking further back, the 18% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Following the firm bounce in price, Jinsanjiang (Zhaoqing) Silicon Material may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 51.2x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.
As an illustration, earnings have deteriorated at Jinsanjiang (Zhaoqing) Silicon Material over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for Jinsanjiang (Zhaoqing) Silicon Material
Does Growth Match The High P/E?
In order to justify its P/E ratio, Jinsanjiang (Zhaoqing) Silicon Material would need to produce outstanding growth well in excess of the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 29%. This means it has also seen a slide in earnings over the longer-term as EPS is down 25% in total over the last three years. 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 41% 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 Jinsanjiang (Zhaoqing) Silicon Material is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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 Jinsanjiang (Zhaoqing) Silicon Material's P/E
Shares in Jinsanjiang (Zhaoqing) Silicon Material have built up some good momentum lately, which has really inflated its P/E. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
Our examination of Jinsanjiang (Zhaoqing) Silicon Material revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you settle on your opinion, we've discovered 3 warning signs for Jinsanjiang (Zhaoqing) Silicon Material (1 is significant!) that you should be aware of.
If you're unsure about the strength of Jinsanjiang (Zhaoqing) Silicon Material's 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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