Nanjing Kangni Mechanical & Electrical Co.,Ltd (SHSE:603111) Held Back By Insufficient Growth Even After Shares Climb 25%

Nanjing Kangni Mechanical & Electrical Co.,Ltd (SHSE:603111) shares have had a really impressive month, gaining 25% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 17% is also fairly reasonable.

Even after such a large jump in price, Nanjing Kangni Mechanical & ElectricalLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.9x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been quite advantageous for Nanjing Kangni Mechanical & ElectricalLtd as its earnings have been rising very briskly. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Nanjing Kangni Mechanical & ElectricalLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Kangni Mechanical & ElectricalLtd will help you shine a light on its historical performance.

Does Growth Match The Low P/E?

Nanjing Kangni Mechanical & ElectricalLtd's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

If we review the last year of earnings growth, the company posted a terrific increase of 37%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 61% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 42% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's understandable that Nanjing Kangni Mechanical & ElectricalLtd's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Bottom Line On Nanjing Kangni Mechanical & ElectricalLtd's P/E

The latest share price surge wasn't enough to lift Nanjing Kangni Mechanical & ElectricalLtd's P/E close to the market median. 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.

As we suspected, our examination of Nanjing Kangni Mechanical & ElectricalLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Nanjing Kangni Mechanical & ElectricalLtd with six simple checks on some of these key factors.

You might be able to find a better investment than Nanjing Kangni Mechanical & ElectricalLtd. 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.