Shenghe Resources Holding Co., Ltd (SHSE:600392) shares have continued their recent momentum with a 30% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.
Following the firm bounce in price, Shenghe Resources Holding's price-to-earnings (or "P/E") ratio of 79.2x 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 36x and even P/E's below 21x 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, Shenghe Resources Holding 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.
How Is Shenghe Resources Holding's Growth Trending?
Shenghe Resources Holding's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.
Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 73% drop in EPS. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to climb by 154% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 40% growth forecast for the broader market.
In light of this, it's understandable that Shenghe Resources Holding's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
What We Can Learn From Shenghe Resources Holding's P/E?
The strong share price surge has got Shenghe Resources Holding's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
As we suspected, our examination of Shenghe Resources Holding's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
You should always think about risks. Case in point, we've spotted 1 warning sign for Shenghe Resources Holding you should be aware of.
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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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.
