There's Reason For Concern Over Ningbo Tuopu Group Co.,Ltd.'s (SHSE:601689) Massive 30% Price Jump

Ningbo Tuopu Group Co.,Ltd. (SHSE:601689) shares have continued their recent momentum with a 30% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 66% in the last year.

Following the firm bounce in price, Ningbo Tuopu GroupLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x 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 as high as it is.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Ningbo Tuopu GroupLtd has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Ningbo Tuopu GroupLtd

Keen to find out how analysts think Ningbo Tuopu GroupLtd's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Ningbo Tuopu GroupLtd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ningbo Tuopu GroupLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 33% last year. The strong recent performance means it was also able to grow EPS by 161% in total over the last three years. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 26% as estimated by the analysts watching the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

In light of this, it's alarming that Ningbo Tuopu GroupLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Ningbo Tuopu GroupLtd's P/E

Ningbo Tuopu GroupLtd's P/E is getting right up there since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Ningbo Tuopu GroupLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Ningbo Tuopu GroupLtd has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

If you're unsure about the strength of Ningbo Tuopu GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.