Those holding Science Environmental Protection Co., Ltd. (SHSE:688480) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking further back, the 19% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Following the firm bounce in price, Science Environmental Protection may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36.2x, since 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.
Science Environmental Protection certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
How Is Science Environmental Protection's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as high as Science Environmental Protection's is when the company's growth is on track to outshine the market.
If we review the last year of earnings growth, the company posted a worthy increase of 7.7%. The latest three year period has also seen a 26% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Turning to the outlook, the next year should generate growth of 71% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.
With this information, we can see why Science Environmental Protection is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Final Word
Science Environmental Protection shares have received a push in the right direction, but its P/E is elevated too. 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 Science Environmental Protection'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.
Before you settle on your opinion, we've discovered 1 warning sign for Science Environmental Protection that you should be aware of.
If you're unsure about the strength of Science Environmental Protection'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.