There wouldn't be many who think Ningxia Qinglong Pipes Industry Group Co., Ltd.'s (SZSE:002457) price-to-earnings (or "P/E") ratio of 36.8x is worth a mention when the median P/E in China is similar at about 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
As an illustration, earnings have deteriorated at Ningxia Qinglong Pipes Industry Group over the last year, which is not ideal at all. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.
View our latest analysis for Ningxia Qinglong Pipes Industry Group
Is There Some Growth For Ningxia Qinglong Pipes Industry Group?
The only time you'd be comfortable seeing a P/E like Ningxia Qinglong Pipes Industry Group's is when the company's growth is tracking the market closely.
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 36%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 5.3% in total. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.
Comparing that to the market, which is predicted to deliver 44% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.
With this information, we find it interesting that Ningxia Qinglong Pipes Industry Group is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.
The Key Takeaway
While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Ningxia Qinglong Pipes Industry Group currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
It is also worth noting that we have found 2 warning signs for Ningxia Qinglong Pipes Industry Group (1 shouldn't be ignored!) that you need to take into consideration.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.
