With a price-to-earnings (or "P/E") ratio of 36x Ningbo Runhe High-Tech Materials Co., Ltd. (SZSE:300727) may be sending bearish signals at the moment, given that almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
For instance, Ningbo Runhe High-Tech Materials' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.
Check out our latest analysis for Ningbo Runhe High-Tech Materials
Does Growth Match The High P/E?
The only time you'd be truly comfortable seeing a P/E as high as Ningbo Runhe High-Tech Materials' is when the company's growth is on track to outshine the market.
Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Even so, admirably EPS has lifted 64% in aggregate from three years ago, notwithstanding the last 12 months. 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 42% 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. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Bottom Line On Ningbo Runhe High-Tech Materials' P/E
Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
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's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ningbo Runhe High-Tech Materials, and understanding them should be part of your investment process.
If these risks are making you reconsider your opinion on Ningbo Runhe High-Tech Materials, 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.