With a price-to-earnings (or "P/E") ratio of 11.7x Jingjin Equipment Inc. (SHSE:603279) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 55x 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 limited.
Jingjin Equipment certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
How Is Jingjin Equipment's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as depressed as Jingjin Equipment's is when the company's growth is on track to lag the market decidedly.
If we review the last year of earnings growth, the company posted a terrific increase of 27%. The latest three year period has also seen an excellent 123% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.
Looking ahead now, EPS is anticipated to climb by 18% during the coming year according to the four analysts following the company. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
In light of this, it's understandable that Jingjin Equipment's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
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 Jingjin Equipment maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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. It's hard to see the share price rising strongly in the near future under these circumstances.
It is also worth noting that we have found 2 warning signs for Jingjin Equipment that you need to take into consideration.
If these risks are making you reconsider your opinion on Jingjin Equipment, explore our interactive list of high quality stocks to get an idea of what else is out there.
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