The Ningbo Tianlong Electronics Co., Ltd. (SHSE:603266) share price has fared very poorly over the last month, falling by a substantial 28%. Looking at the bigger picture, even after this poor month the stock is up 33% in the last year.
In spite of the heavy fall in price, there still wouldn't be many who think Ningbo Tianlong Electronics' price-to-earnings (or "P/E") ratio of 31.8x is worth a mention when the median P/E in China is similar at about 30x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
As an illustration, earnings have deteriorated at Ningbo Tianlong Electronics over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. 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.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Ningbo Tianlong Electronics' is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered a frustrating 5.0% decrease to the company's bottom line. Even so, admirably EPS has lifted 35% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
This is in contrast to the rest of the market, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's curious that Ningbo Tianlong Electronics' P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.
The Bottom Line On Ningbo Tianlong Electronics' P/E
Following Ningbo Tianlong Electronics' share price tumble, its P/E is now hanging on to the median market P/E. 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 Ningbo Tianlong Electronics 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.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Ningbo Tianlong Electronics you should know about.
Of course, you might also be able to find a better stock than Ningbo Tianlong Electronics. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.