Investors Aren't Entirely Convinced By Jiangsu Rongtai Industry Co., Ltd.'s (SHSE:605133) Earnings

It's not a stretch to say that Jiangsu Rongtai Industry Co., Ltd.'s (SHSE:605133) price-to-earnings (or "P/E") ratio of 37.1x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 38x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Jiangsu Rongtai Industry has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping it doesn't keep underperforming if your plan is to pick up some stock while it's not in favour.

Check out our latest analysis for Jiangsu Rongtai Industry

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Rongtai Industry.

Does Growth Match The P/E?

In order to justify its P/E ratio, Jiangsu Rongtai Industry would need to produce growth that's similar to the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 9.1%. Regardless, EPS has managed to lift by a handy 11% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 68% over the next year. That's shaping up to be materially higher than the 37% growth forecast for the broader market.

In light of this, it's curious that Jiangsu Rongtai Industry's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Jiangsu Rongtai Industry's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

It is also worth noting that we have found 1 warning sign for Jiangsu Rongtai Industry that you need to take into consideration.

Of course, you might also be able to find a better stock than Jiangsu Rongtai Industry. 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.