TianJin JinRong TianYu Precision Machinery Inc.'s (SZSE:300988) Shares Climb 40% But Its Business Is Yet to Catch Up

TianJin JinRong TianYu Precision Machinery Inc. (SZSE:300988) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 6.9% isn't as impressive.

Since its price has surged higher, TianJin JinRong TianYu Precision Machinery may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 34.3x, since almost half of all companies in China have P/E ratios under 31x and even P/E's lower than 19x are not unusual. 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.

TianJin JinRong TianYu Precision Machinery has been doing a decent job lately as it's been growing earnings at a reasonable pace. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for TianJin JinRong TianYu Precision Machinery

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on TianJin JinRong TianYu Precision Machinery will help you shine a light on its historical performance.

Is There Enough Growth For TianJin JinRong TianYu Precision Machinery?

The only time you'd be truly comfortable seeing a P/E as high as TianJin JinRong TianYu Precision Machinery's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered a decent 4.8% gain to the company's bottom line. Still, EPS has barely risen at all in aggregate from three years ago, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that TianJin JinRong TianYu Precision Machinery's P/E sits above the majority of other companies. 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 Bottom Line On TianJin JinRong TianYu Precision Machinery's P/E

TianJin JinRong TianYu Precision Machinery's P/E is getting right up there since its shares have risen strongly. 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 TianJin JinRong TianYu Precision Machinery 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for TianJin JinRong TianYu Precision Machinery (2 are concerning!) that you should be aware of before investing here.

You might be able to find a better investment than TianJin JinRong TianYu Precision Machinery. 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.