Despite an already strong run, Inner Mongolia Junzheng Energy & Chemical Group Co.,Ltd. (SHSE:601216) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 75%.

In spite of the firm bounce in price, Inner Mongolia Junzheng Energy & Chemical GroupLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.9x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 74x 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 limited.

For instance, Inner Mongolia Junzheng Energy & Chemical GroupLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Is There Any Growth For Inner Mongolia Junzheng Energy & Chemical GroupLtd?

The only time you'd be truly comfortable seeing a P/E as low as Inner Mongolia Junzheng Energy & Chemical GroupLtd's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. This means it has also seen a slide in earnings over the longer-term as EPS is down 53% in total over the last three years. 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.

In light of this, it's understandable that Inner Mongolia Junzheng Energy & Chemical GroupLtd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

What We Can Learn From Inner Mongolia Junzheng Energy & Chemical GroupLtd's P/E?

Despite Inner Mongolia Junzheng Energy & Chemical GroupLtd's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Inner Mongolia Junzheng Energy & Chemical GroupLtd maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Inner Mongolia Junzheng Energy & Chemical GroupLtd is showing 3 warning signs in our investment analysis, and 2 of those are a bit concerning.

If you're unsure about the strength of Inner Mongolia Junzheng Energy & Chemical GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.