Jiangsu Yunyi Electric Co.,Ltd. (SZSE:300304) Soars 47% But It's A Story Of Risk Vs Reward

Jiangsu Yunyi Electric Co.,Ltd. (SZSE:300304) shareholders would be excited to see that the share price has had a great month, posting a 47% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 46%.

Although its price has surged higher, Jiangsu Yunyi ElectricLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.6x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Jiangsu Yunyi ElectricLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

Check out our latest analysis for Jiangsu Yunyi ElectricLtd

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Does Growth Match The Low P/E?

Jiangsu Yunyi ElectricLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 63% last year. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next three years should generate growth of 18% each year as estimated by the only analyst watching the company. With the market predicted to deliver 19% growth each year, the company is positioned for a comparable earnings result.

In light of this, it's peculiar that Jiangsu Yunyi ElectricLtd's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Final Word

Despite Jiangsu Yunyi ElectricLtd's shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Jiangsu Yunyi ElectricLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide more support to the share price.

Having said that, be aware Jiangsu Yunyi ElectricLtd is showing 1 warning sign in our investment analysis, you should know about.

You might be able to find a better investment than Jiangsu Yunyi ElectricLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.