What Jiangsu New Technology Group Co.,Ltd.'s (SZSE:301229) 46% Share Price Gain Is Not Telling You

Jiangsu New Technology Group Co.,Ltd. (SZSE:301229) shareholders would be excited to see that the share price has had a great month, posting a 46% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

After such a large jump in price, Jiangsu New Technology GroupLtd's price-to-earnings (or "P/E") ratio of 50.2x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 39x and even P/E's below 22x are quite common. 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.

As an illustration, earnings have deteriorated at Jiangsu New Technology GroupLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do 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.

Check out our latest analysis for Jiangsu New Technology GroupLtd

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

Does Growth Match The High P/E?

In order to justify its P/E ratio, Jiangsu New Technology GroupLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 5.5% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 8.2% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

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

In light of this, it's alarming that Jiangsu New Technology GroupLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Jiangsu New Technology GroupLtd's P/E

Jiangsu New Technology GroupLtd's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Jiangsu New Technology GroupLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Jiangsu New Technology GroupLtd with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Jiangsu New Technology GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.