Nanjing CIGU Technology Corp.,LTD.'s (SHSE:688448) 67% Share Price Surge Not Quite Adding Up

Nanjing CIGU Technology Corp.,LTD. (SHSE:688448) shareholders have had their patience rewarded with a 67% share price jump in the last month. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Since its price has surged higher, Nanjing CIGU TechnologyLTD may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 48.8x, since almost half of all companies in China have P/E ratios under 34x and even P/E's lower than 20x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

The recent earnings growth at Nanjing CIGU TechnologyLTD would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Nanjing CIGU TechnologyLTD

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 Nanjing CIGU TechnologyLTD's earnings, revenue and cash flow.

How Is Nanjing CIGU TechnologyLTD's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Nanjing CIGU TechnologyLTD's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.5% last year. Still, lamentably EPS has fallen 38% in aggregate from three years ago, which is disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 40% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Nanjing CIGU TechnologyLTD is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The large bounce in Nanjing CIGU TechnologyLTD's shares has lifted the company's P/E to a fairly high level. 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.

Our examination of Nanjing CIGU TechnologyLTD revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Nanjing CIGU TechnologyLTD has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.