The SAN BIAN SCIENCE& TECHNOLOGY Co., LTD. (SZSE:002112) share price has fared very poorly over the last month, falling by a substantial 28%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 10% share price drop.
Even after such a large drop in price, SAN BIAN SCIENCE& TECHNOLOGY's price-to-earnings (or "P/E") ratio of 36.3x might still make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 27x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, SAN BIAN SCIENCE& TECHNOLOGY has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Is There Enough Growth For SAN BIAN SCIENCE& TECHNOLOGY?
The only time you'd be truly comfortable seeing a P/E as high as SAN BIAN SCIENCE& TECHNOLOGY's is when the company's growth is on track to outshine the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 129% last year. The strong recent performance means it was also able to grow EPS by 92% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it concerning that SAN BIAN SCIENCE& TECHNOLOGY 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 Key Takeaway
There's still some solid strength behind SAN BIAN SCIENCE& TECHNOLOGY's P/E, if not its share price lately. 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 SAN BIAN SCIENCE& TECHNOLOGY currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.
You should always think about risks. Case in point, we've spotted 2 warning signs for SAN BIAN SCIENCE& TECHNOLOGY you should be aware of.
Of course, you might also be able to find a better stock than SAN BIAN SCIENCE& TECHNOLOGY. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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