There's Reason For Concern Over Jiangsu Seagull Cooling Tower Co.,Ltd.'s (SHSE:603269) Massive 37% Price Jump

Jiangsu Seagull Cooling Tower Co.,Ltd. (SHSE:603269) shares have continued their recent momentum with a 37% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

In spite of the firm bounce in price, there still wouldn't be many who think Jiangsu Seagull Cooling TowerLtd's price-to-earnings (or "P/E") ratio of 34.9x is worth a mention when the median P/E in China is similar at about 33x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Jiangsu Seagull Cooling TowerLtd has been doing a good job lately as it's been growing earnings at a solid pace. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Jiangsu Seagull Cooling TowerLtd

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 Jiangsu Seagull Cooling TowerLtd's earnings, revenue and cash flow.

Is There Some Growth For Jiangsu Seagull Cooling TowerLtd?

The only time you'd be comfortable seeing a P/E like Jiangsu Seagull Cooling TowerLtd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 24% gain to the company's bottom line. The latest three year period has also seen a 22% 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.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Jiangsu Seagull Cooling TowerLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Jiangsu Seagull Cooling TowerLtd's P/E?

Jiangsu Seagull Cooling TowerLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Seagull Cooling TowerLtd currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Jiangsu Seagull Cooling TowerLtd is showing 2 warning signs in our investment analysis, you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.