JiangSu Changling Hydraulic Co.,Ltd's (SHSE:605389) 27% Price Boost Is Out Of Tune With Earnings

The JiangSu Changling Hydraulic Co.,Ltd (SHSE:605389) share price has done very well over the last month, posting an excellent gain of 27%. Looking back a bit further, it's encouraging to see the stock is up 47% in the last year.

Although its price has surged higher, it's still not a stretch to say that JiangSu Changling HydraulicLtd's price-to-earnings (or "P/E") ratio of 40x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 39x. 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.

The recent earnings growth at JiangSu Changling HydraulicLtd would have to be considered satisfactory if not spectacular. It might be that many expect the respectable earnings performance to only match most other companies over the coming period, which has kept the P/E from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

Check out our latest analysis for JiangSu Changling HydraulicLtd

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

Does Growth Match The P/E?

JiangSu Changling HydraulicLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

If we review the last year of earnings growth, the company posted a worthy increase of 5.5%. However, this wasn't enough as the latest three year period has seen an unpleasant 57% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's somewhat alarming that JiangSu Changling HydraulicLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On JiangSu Changling HydraulicLtd's P/E

JiangSu Changling HydraulicLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Changling HydraulicLtd revealed its shrinking earnings over the medium-term aren't impacting its P/E as much as we would have predicted, given the market is set to grow. Right now we are uncomfortable with the P/E as this earnings performance is unlikely 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.

There are also other vital risk factors to consider and we've discovered 3 warning signs for JiangSu Changling HydraulicLtd (2 don't sit too well with us!) that you should be aware of before investing here.

You might be able to find a better investment than JiangSu Changling HydraulicLtd. 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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.