Sinomach General Machinery Science & Technology Co.,Ltd. (SHSE:600444) Stock Rockets 34% As Investors Are Less Pessimistic Than Expected

Sinomach General Machinery Science & Technology Co.,Ltd. (SHSE:600444) shares have continued their recent momentum with a 34% gain in the last month alone. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, Sinomach General Machinery Science & TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 52.9x, since almost half of all companies in China have P/E ratios under 32x 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 so lofty.

With earnings growth that's exceedingly strong of late, Sinomach General Machinery Science & TechnologyLtd has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Sinomach General Machinery Science & TechnologyLtd

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 Sinomach General Machinery Science & TechnologyLtd's earnings, revenue and cash flow.

Is There Enough Growth For Sinomach General Machinery Science & TechnologyLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Sinomach General Machinery Science & TechnologyLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 68%. However, this wasn't enough as the latest three year period has seen a very unpleasant 21% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

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 Sinomach General Machinery Science & TechnologyLtd'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 Sinomach General Machinery Science & TechnologyLtd's P/E

The strong share price surge has got Sinomach General Machinery Science & TechnologyLtd'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.

We've established that Sinomach General Machinery Science & TechnologyLtd 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. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Sinomach General Machinery Science & TechnologyLtd (including 2 which can't be ignored).

If you're unsure about the strength of Sinomach General Machinery Science & TechnologyLtd'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.