Jiangsu Guomao Reducer Co., Ltd. (SHSE:603915) Soars 28% But It's A Story Of Risk Vs Reward

Despite an already strong run, Jiangsu Guomao Reducer Co., Ltd. (SHSE:603915) shares have been powering on, with a gain of 28% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

Although its price has surged higher, Jiangsu Guomao Reducer may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 23.9x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 71x 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.

Jiangsu Guomao Reducer has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Jiangsu Guomao Reducer

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Guomao Reducer.

Is There Any Growth For Jiangsu Guomao Reducer?

The only time you'd be truly comfortable seeing a P/E as low as Jiangsu Guomao Reducer's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 17%. The last three years don't look nice either as the company has shrunk EPS by 29% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 39% during the coming year according to the three analysts following the company. With the market predicted to deliver 39% growth , the company is positioned for a comparable earnings result.

With this information, we find it odd that Jiangsu Guomao Reducer is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On Jiangsu Guomao Reducer's P/E

Jiangsu Guomao Reducer's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Jiangsu Guomao Reducer's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see an average earnings outlook with market-like growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Jiangsu Guomao Reducer with six simple checks on some of these key factors.

Of course, you might also be able to find a better stock than Jiangsu Guomao Reducer. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.