Market Participants Recognise North Industries Group Red Arrow Co., Ltd's (SZSE:000519) Earnings Pushing Shares 28% Higher

North Industries Group Red Arrow Co., Ltd (SZSE:000519) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Since its price has surged higher, North Industries Group Red Arrow may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 45.8x, since almost half of all companies in China have P/E ratios under 38x and even P/E's lower than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, North Industries Group Red Arrow has been doing quite well of late. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for North Industries Group Red Arrow

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How Is North Industries Group Red Arrow's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as North Industries Group Red Arrow's is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 291% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 67% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 37%, which is noticeably less attractive.

With this information, we can see why North Industries Group Red Arrow is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On North Industries Group Red Arrow's P/E

North Industries Group Red Arrow shares have received a push in the right direction, but its P/E is elevated too. 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.

We've established that North Industries Group Red Arrow maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for North Industries Group Red Arrow that you should be aware of.

You might be able to find a better investment than North Industries Group Red Arrow. 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.