What Tianjin Pengling Group Co.,Ltd's (SZSE:300375) 39% Share Price Gain Is Not Telling You

The Tianjin Pengling Group Co.,Ltd (SZSE:300375) share price has done very well over the last month, posting an excellent gain of 39%. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

After such a large jump in price, Tianjin Pengling GroupLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.1x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Tianjin Pengling GroupLtd has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Tianjin Pengling GroupLtd

Although there are no analyst estimates available for Tianjin Pengling GroupLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Tianjin Pengling GroupLtd's Growth Trending?

In order to justify its P/E ratio, Tianjin Pengling GroupLtd would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered an exceptional 88% gain to the company's bottom line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Tianjin Pengling GroupLtd 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

The strong share price surge has got Tianjin Pengling GroupLtd's P/E rushing to great heights as well. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

Our examination of Tianjin Pengling GroupLtd 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. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Tianjin Pengling GroupLtd (including 1 which can't be ignored).

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.