Jiangsu LiXing General Steel Ball Co.,Ltd.'s (SZSE:300421) 27% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Jiangsu LiXing General Steel Ball Co.,Ltd. (SZSE:300421) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

Following the firm bounce in price, Jiangsu LiXing General Steel BallLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.8x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x 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.

For instance, Jiangsu LiXing General Steel BallLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, 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 Jiangsu LiXing General Steel BallLtd

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 Jiangsu LiXing General Steel BallLtd's earnings, revenue and cash flow.

How Is Jiangsu LiXing General Steel BallLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangsu LiXing General Steel BallLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. As a result, earnings from three years ago have also fallen 51% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Jiangsu LiXing General Steel BallLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Jiangsu LiXing General Steel BallLtd's P/E

The strong share price surge has got Jiangsu LiXing General Steel BallLtd's P/E rushing to great heights as well. 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.

Our examination of Jiangsu LiXing General Steel BallLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely 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.

Having said that, be aware Jiangsu LiXing General Steel BallLtd is showing 2 warning signs in our investment analysis, you should know about.

Of course, you might also be able to find a better stock than Jiangsu LiXing General Steel BallLtd. 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.