Jiangyin Haida Rubber And Plastic Co., Ltd. (SZSE:300320) shares have continued their recent momentum with a 39% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 6.6% isn't as attractive.
Since its price has surged higher, Jiangyin Haida Rubber And Plastic may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.4x, 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 as high as it is.
With earnings growth that's exceedingly strong of late, Jiangyin Haida Rubber And Plastic has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
What Are Growth Metrics Telling Us About The High P/E?
In order to justify its P/E ratio, Jiangyin Haida Rubber And Plastic would need to produce impressive growth in excess of the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 36% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.
In contrast to the company, the rest of the market is expected to grow by 38% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
With this information, we find it concerning that Jiangyin Haida Rubber And Plastic is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.
What We Can Learn From Jiangyin Haida Rubber And Plastic's P/E?
The large bounce in Jiangyin Haida Rubber And Plastic's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Jiangyin Haida Rubber And Plastic currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Before you settle on your opinion, we've discovered 1 warning sign for Jiangyin Haida Rubber And Plastic that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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