Ningbo Shuanglin Auto Parts Co.,Ltd. (SZSE:300100) Soars 29% But It's A Story Of Risk Vs Reward

Ningbo Shuanglin Auto Parts Co.,Ltd. (SZSE:300100) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 136% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may still consider Ningbo Shuanglin Auto PartsLtd as an attractive investment with its 26.9x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's exceedingly strong of late, Ningbo Shuanglin Auto PartsLtd has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

See our latest analysis for Ningbo Shuanglin Auto PartsLtd

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 Ningbo Shuanglin Auto PartsLtd's earnings, revenue and cash flow.

How Is Ningbo Shuanglin Auto PartsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Ningbo Shuanglin Auto PartsLtd's is when the company's growth is on track to lag the market.

If we review the last year of earnings growth, the company posted a terrific increase of 293%. The strong recent performance means it was also able to grow EPS by 2,656% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably more attractive on an annualised basis.

With this information, we find it odd that Ningbo Shuanglin Auto PartsLtd is trading at a P/E lower than the market. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Ningbo Shuanglin Auto PartsLtd's P/E?

Ningbo Shuanglin Auto PartsLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Ningbo Shuanglin Auto PartsLtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 1 warning sign for Ningbo Shuanglin Auto PartsLtd that you need to take into consideration.

Of course, you might also be able to find a better stock than Ningbo Shuanglin Auto PartsLtd. 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.