Jiangsu Tongli Risheng Machinery Co., Ltd.'s (SHSE:605286) Price Is Right But Growth Is Lacking After Shares Rocket 30%

Despite an already strong run, Jiangsu Tongli Risheng Machinery Co., Ltd. (SHSE:605286) shares have been powering on, with a gain of 30% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

In spite of the firm bounce in price, Jiangsu Tongli Risheng Machinery may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 19.7x, 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.

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 that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Jiangsu Tongli Risheng Machinery

Although there are no analyst estimates available for Jiangsu Tongli Risheng Machinery, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Jiangsu Tongli Risheng Machinery's Growth Trending?

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

Retrospectively, the last year delivered an exceptional 68% gain to the company's bottom line. The latest three year period has also seen an excellent 69% overall rise in EPS, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

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

Despite Jiangsu Tongli Risheng Machinery's shares building up a head of steam, its P/E still lags most other companies. 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 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Jiangsu Tongli Risheng Machinery that you should be aware of.

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.