There's Reason For Concern Over Jianshe Industry Group (Yunnan) Co., Ltd.'s (SZSE:002265) Massive 53% Price Jump

Jianshe Industry Group (Yunnan) Co., Ltd. (SZSE:002265) shares have continued their recent momentum with a 53% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Jianshe Industry Group (Yunnan) as a stock to avoid entirely with its 66.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Jianshe Industry Group (Yunnan) certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Jianshe Industry Group (Yunnan)

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jianshe Industry Group (Yunnan)'s earnings, revenue and cash flow.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as Jianshe Industry Group (Yunnan)'s is when the company's growth is on track to outshine the market decidedly.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Jianshe Industry Group (Yunnan) is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Jianshe Industry Group (Yunnan)'s P/E?

Shares in Jianshe Industry Group (Yunnan) have built up some good momentum lately, which has really inflated its P/E. 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 Jianshe Industry Group (Yunnan) revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Jianshe Industry Group (Yunnan) that you should be aware of.

If these risks are making you reconsider your opinion on Jianshe Industry Group (Yunnan), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.