Optimistic Investors Push WINBO-Dongjian Automotive Technology Co., Ltd. (SZSE:300978) Shares Up 39% But Growth Is Lacking

WINBO-Dongjian Automotive Technology Co., Ltd. (SZSE:300978) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.3% in the last twelve months.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider WINBO-Dongjian Automotive Technology as a stock to potentially avoid with its 37.1x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

WINBO-Dongjian Automotive Technology has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable 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.

See our latest analysis for WINBO-Dongjian Automotive Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on WINBO-Dongjian Automotive Technology will help you shine a light on its historical performance.

Does Growth Match The High P/E?

The only time you'd be truly comfortable seeing a P/E as high as WINBO-Dongjian Automotive Technology's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 28% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 23% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that WINBO-Dongjian Automotive Technology is trading at a P/E higher than the market. 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.

What We Can Learn From WINBO-Dongjian Automotive Technology's P/E?

The large bounce in WINBO-Dongjian Automotive Technology's shares has lifted the company's P/E to a fairly high level. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of WINBO-Dongjian Automotive Technology 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. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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 3 warning signs we've spotted with WINBO-Dongjian Automotive Technology (including 2 which are significant).

If these risks are making you reconsider your opinion on WINBO-Dongjian Automotive Technology, 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.