The Ningbo Techmation Co.,Ltd. (SHSE:603015) share price has fared very poorly over the last month, falling by a substantial 29%. The recent drop has obliterated the annual return, with the share price now down 9.5% over that longer period.
In spite of the heavy fall in price, Ningbo TechmationLtd may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 74.5x, 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. 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.
As an illustration, earnings have deteriorated at Ningbo TechmationLtd over the last year, which is not ideal at all. 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.
See our latest analysis for Ningbo TechmationLtd
Does Growth Match The High P/E?
There's an inherent assumption that a company should far outperform the market for P/E ratios like Ningbo TechmationLtd's to be considered reasonable.
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 30%. The last three years don't look nice either as the company has shrunk EPS by 40% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
In contrast to the company, the rest of the market is expected to grow by 42% 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 Ningbo TechmationLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.
The Bottom Line On Ningbo TechmationLtd's P/E
A significant share price dive has done very little to deflate Ningbo TechmationLtd's very lofty P/E. 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.
Our examination of Ningbo TechmationLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.
Having said that, be aware Ningbo TechmationLtd is showing 3 warning signs in our investment analysis, you should know about.
If these risks are making you reconsider your opinion on Ningbo TechmationLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.