Henan Liliang Diamond Co., Ltd. (SZSE:301071) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Looking further back, the 14% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
Even after such a large jump in price, it's still not a stretch to say that Henan Liliang Diamond's price-to-earnings (or "P/E") ratio of 33.2x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
Recent times haven't been advantageous for Henan Liliang Diamond as its earnings have been falling quicker than most other companies. One possibility is that the P/E is moderate because investors think the company's earnings trend will eventually fall in line with most others in the market. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Henan Liliang Diamond.
What Are Growth Metrics Telling Us About The P/E?
Henan Liliang Diamond's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. The last three years don't look nice either as the company has shrunk EPS by 6.5% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 49% over the next year. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.
With this information, we find it interesting that Henan Liliang Diamond is trading at a fairly similar P/E to the market. It may be that most investors aren't convinced the company can achieve future growth expectations.
What We Can Learn From Henan Liliang Diamond's P/E?
Its shares have lifted substantially and now Henan Liliang Diamond's P/E is also back up to the market median. 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.
Our examination of Henan Liliang Diamond's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
You always need to take note of risks, for example - Henan Liliang Diamond has 2 warning signs we think 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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