Jiangsu Tongli Risheng Machinery Co., Ltd. (SHSE:605286) Stock Catapults 26% Though Its Price And Business Still Lag The Market

Jiangsu Tongli Risheng Machinery Co., Ltd. (SHSE:605286) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 89%.

Even after such a large jump in price, Jiangsu Tongli Risheng Machinery's price-to-earnings (or "P/E") ratio of 22.7x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 39x and even P/E's above 75x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Jiangsu Tongli Risheng Machinery has been doing very well. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. 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 out of favour.

See our latest analysis for Jiangsu Tongli Risheng Machinery

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Jiangsu Tongli Risheng Machinery will help you shine a light on its historical performance.

Is There Any Growth For Jiangsu Tongli Risheng Machinery?

In order to justify its P/E ratio, Jiangsu Tongli Risheng Machinery would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 68%. The strong recent performance means it was also able to grow EPS by 69% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Jiangsu Tongli Risheng Machinery is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Jiangsu Tongli Risheng Machinery's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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.

As we suspected, our examination of Jiangsu Tongli Risheng Machinery revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Jiangsu Tongli Risheng Machinery you should know about.

You might be able to find a better investment than Jiangsu Tongli Risheng Machinery. 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.