There's No Escaping Changshu Tongrun Auto Accessory Co., Ltd.'s (SHSE:603201) Muted Earnings Despite A 34% Share Price Rise

Changshu Tongrun Auto Accessory Co., Ltd. (SHSE:603201) shares have continued their recent momentum with a 34% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Even after such a large jump in price, Changshu Tongrun Auto Accessory may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 14.6x, since almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 68x 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 limited.

Recent times have been pleasing for Changshu Tongrun Auto Accessory as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Changshu Tongrun Auto Accessory

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Is There Any Growth For Changshu Tongrun Auto Accessory?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Changshu Tongrun Auto Accessory's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 42%. The latest three year period has also seen a 23% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 28% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

In light of this, it's understandable that Changshu Tongrun Auto Accessory's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Changshu Tongrun Auto Accessory's recent share price jump still sees its P/E sitting firmly flat on the ground. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Changshu Tongrun Auto Accessory maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for Changshu Tongrun Auto Accessory that we have uncovered.

If you're unsure about the strength of Changshu Tongrun Auto Accessory'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.