Stock Analysis

Chongqing Zongshen Power Machinery Co.,Ltd's (SZSE:001696) 38% Jump Shows Its Popularity With Investors

SZSE:001696
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Chongqing Zongshen Power Machinery Co.,Ltd (SZSE:001696) shares have had a really impressive month, gaining 38% after a shaky period beforehand. The last month tops off a massive increase of 102% in the last year.

Since its price has surged higher, Chongqing Zongshen Power MachineryLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 44x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x 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 lofty.

Chongqing Zongshen Power MachineryLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Chongqing Zongshen Power MachineryLtd

pe-multiple-vs-industry
SZSE:001696 Price to Earnings Ratio vs Industry August 1st 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chongqing Zongshen Power MachineryLtd.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Chongqing Zongshen Power MachineryLtd's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 6.4%. This means it has also seen a slide in earnings over the longer-term as EPS is down 40% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 37% per year over the next three years. Meanwhile, the rest of the market is forecast to only expand by 24% each year, which is noticeably less attractive.

In light of this, it's understandable that Chongqing Zongshen Power MachineryLtd's P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in Chongqing Zongshen Power MachineryLtd have built up some good momentum lately, which has really inflated its P/E. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Chongqing Zongshen Power MachineryLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Chongqing Zongshen Power MachineryLtd (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If you're unsure about the strength of Chongqing Zongshen Power MachineryLtd'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.