Those holding Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

After such a large jump in price, Ningbo Runhe High-Tech Materials may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 35.1x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

For instance, Ningbo Runhe High-Tech Materials' receding earnings in recent times would have to be some food for thought. 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.

Is There Enough Growth For Ningbo Runhe High-Tech Materials?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ningbo Runhe High-Tech Materials' to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. Still, the latest three year period has seen an excellent 64% overall rise in EPS, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Ningbo Runhe High-Tech Materials 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Ningbo Runhe High-Tech Materials' shares has lifted the company's P/E to a fairly high level. 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 Ningbo Runhe High-Tech Materials revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Ningbo Runhe High-Tech Materials that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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