Even With A 29% Surge, Cautious Investors Are Not Rewarding JinGuan Electric Co., Ltd.'s (SHSE:688517) Performance Completely

The JinGuan Electric Co., Ltd. (SHSE:688517) share price has done very well over the last month, posting an excellent gain of 29%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

Although its price has surged higher, JinGuan Electric may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 21x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 61x 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.

JinGuan Electric certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. 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 JinGuan Electric

Keen to find out how analysts think JinGuan Electric's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For JinGuan Electric?

In order to justify its P/E ratio, JinGuan Electric would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a worthy increase of 8.8%. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 20% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 162% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

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

What We Can Learn From JinGuan Electric's P/E?

The latest share price surge wasn't enough to lift JinGuan Electric's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that JinGuan Electric currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

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

Of course, you might also be able to find a better stock than JinGuan Electric. 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.