SUFA Technology Industry Co., Ltd., CNNC's (SZSE:000777) Shares Climb 31% But Its Business Is Yet to Catch Up

SUFA Technology Industry Co., Ltd., CNNC (SZSE:000777) shares have continued their recent momentum with a 31% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 59% in the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about SUFA Technology Industry CNNC's P/E ratio of 28.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 29x. 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.

Recent times have been advantageous for SUFA Technology Industry CNNC as its earnings have been rising faster than most other companies. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for SUFA Technology Industry CNNC

Want the full picture on analyst estimates for the company? Then our free report on SUFA Technology Industry CNNC will help you uncover what's on the horizon.

Does Growth Match The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like SUFA Technology Industry CNNC's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 132% gain to the company's bottom line. Pleasingly, EPS has also lifted 164% 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 dual analysts covering the company suggest earnings should grow by 15% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader market.

In light of this, it's curious that SUFA Technology Industry CNNC's P/E sits in line with the majority of other companies. 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.

What We Can Learn From SUFA Technology Industry CNNC's P/E?

Its shares have lifted substantially and now SUFA Technology Industry CNNC's P/E is also back up to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that SUFA Technology Industry CNNC 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for SUFA Technology Industry CNNC with six simple checks on some of these key factors.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.