Despite an already strong run, Guangdong Skychem Technology Co., Ltd. (SHSE:688603) shares have been powering on, with a gain of 34% in the last thirty days. The last 30 days bring the annual gain to a very sharp 34%.

Following the firm bounce in price, Guangdong Skychem Technology's price-to-earnings (or "P/E") ratio of 76.7x 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 34x and even P/E's below 20x 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Guangdong Skychem Technology has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Growth For Guangdong Skychem Technology?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 7.0% last year. EPS has also lifted 21% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 66% over the next year. Meanwhile, the rest of the market is forecast to only expand by 40%, which is noticeably less attractive.

In light of this, it's understandable that Guangdong Skychem Technology'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.

The Bottom Line On Guangdong Skychem Technology's P/E

Shares in Guangdong Skychem Technology have built up some good momentum lately, which has really inflated its P/E. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Guangdong Skychem Technology's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Guangdong Skychem Technology with six simple checks.

Of course, you might also be able to find a better stock than Guangdong Skychem 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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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.