ChengDu ShengNuo Biotec Co.,Ltd. (SHSE:688117) shares have had a really impressive month, gaining 37% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 3.6% isn't as attractive.

Since its price has surged higher, ChengDu ShengNuo BiotecLtd's price-to-earnings (or "P/E") ratio of 42.4x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 25x and even P/E's below 15x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times have been advantageous for ChengDu ShengNuo BiotecLtd as its earnings have been rising faster than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is ChengDu ShengNuo BiotecLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like ChengDu ShengNuo BiotecLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.4% last year. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Looking ahead now, EPS is anticipated to climb by 41% per year during the coming three years according to the sole analyst following the company. Meanwhile, the rest of the market is forecast to only expand by 23% each year, which is noticeably less attractive.

In light of this, it's understandable that ChengDu ShengNuo BiotecLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From ChengDu ShengNuo BiotecLtd's P/E?

ChengDu ShengNuo BiotecLtd'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.

We've established that ChengDu ShengNuo BiotecLtd 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. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for ChengDu ShengNuo BiotecLtd (1 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of ChengDu ShengNuo BiotecLtd'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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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.