GRIPM Advanced Materials Co., Ltd. (SHSE:688456) shares have continued their recent momentum with a 32% gain in the last month alone. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Since its price has surged higher, GRIPM Advanced Materials may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 67.1x, since almost half of all companies in China have P/E ratios under 32x and even P/E's lower than 20x are not unusual. 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.
Recent times have been advantageous for GRIPM Advanced Materials as its earnings have been rising faster than most other companies. The P/E is probably high because investors think this strong earnings performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.
Does Growth Match The High P/E?
GRIPM Advanced Materials' 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.
If we review the last year of earnings growth, the company posted a worthy increase of 8.1%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 70% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Turning to the outlook, the next three years should generate growth of 31% per year as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 25% each year growth forecast for the broader market.
In light of this, it's understandable that GRIPM Advanced Materials' 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.
What We Can Learn From GRIPM Advanced Materials' P/E?
The strong share price surge has got GRIPM Advanced Materials' P/E rushing to great heights as well. 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.
As we suspected, our examination of GRIPM Advanced Materials' 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. It's hard to see the share price falling strongly in the near future under these circumstances.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for GRIPM Advanced Materials with six simple checks will allow you to discover any risks that could be an issue.
If you're unsure about the strength of GRIPM Advanced Materials' 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.
