Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) shareholders are no doubt pleased to see that the share price has bounced 30% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 30% in the last twelve months.

Following the firm bounce in price, Jianshe Industry Group (Yunnan) may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 51.3x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Jianshe Industry Group (Yunnan)'s financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Growth For Jianshe Industry Group (Yunnan)?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jianshe Industry Group (Yunnan)'s to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 44%. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Jianshe Industry Group (Yunnan) 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.

What We Can Learn From Jianshe Industry Group (Yunnan)'s P/E?

The strong share price surge has got Jianshe Industry Group (Yunnan)'s 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.

Our examination of Jianshe Industry Group (Yunnan) revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Jianshe Industry Group (Yunnan) has 3 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Jianshe Industry Group (Yunnan). 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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