There's Reason For Concern Over Aecc Aero-Engine Control Co.,Ltd.'s (SZSE:000738) Massive 27% Price Jump

Those holding Aecc Aero-Engine Control Co.,Ltd. (SZSE:000738) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

Although its price has surged higher, there still wouldn't be many who think Aecc Aero-Engine ControlLtd's price-to-earnings (or "P/E") ratio of 31.2x is worth a mention when the median P/E in China is similar at about 30x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Aecc Aero-Engine ControlLtd has been doing quite well of late. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient 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 not quite in favour.

See our latest analysis for Aecc Aero-Engine ControlLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Aecc Aero-Engine ControlLtd.

How Is Aecc Aero-Engine ControlLtd's Growth Trending?

There's an inherent assumption that a company should be matching the market for P/E ratios like Aecc Aero-Engine ControlLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Pleasingly, EPS has also lifted 80% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the five analysts covering the company suggest earnings should grow by 31% over the next year. That's shaping up to be materially lower than the 41% growth forecast for the broader market.

With this information, we find it interesting that Aecc Aero-Engine ControlLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Its shares have lifted substantially and now Aecc Aero-Engine ControlLtd's P/E is also back up to the market median. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Aecc Aero-Engine ControlLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Aecc Aero-Engine ControlLtd that you should be aware of.

You might be able to find a better investment than Aecc Aero-Engine ControlLtd. 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.