Sichuan Zigong Conveying Machine Group Co., Ltd.'s (SZSE:001288) Shares Climb 29% But Its Business Is Yet to Catch Up

Sichuan Zigong Conveying Machine Group Co., Ltd. (SZSE:001288) shareholders have had their patience rewarded with a 29% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 38% in the last year.

Although its price has surged higher, it's still not a stretch to say that Sichuan Zigong Conveying Machine Group's price-to-earnings (or "P/E") ratio of 34.6x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 32x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Earnings have risen firmly for Sichuan Zigong Conveying Machine Group recently, which is pleasing to see. It might be that many expect the respectable earnings performance to wane, which has kept the P/E from rising. 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 Sichuan Zigong Conveying Machine Group

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 Sichuan Zigong Conveying Machine Group's earnings, revenue and cash flow.

Does Growth Match The P/E?

The only time you'd be comfortable seeing a P/E like Sichuan Zigong Conveying Machine Group's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Still, incredibly EPS has fallen 24% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Sichuan Zigong Conveying Machine Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Its shares have lifted substantially and now Sichuan Zigong Conveying Machine Group'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 Sichuan Zigong Conveying Machine Group currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Sichuan Zigong Conveying Machine Group with six simple checks will allow you to discover any risks that could be an issue.

Of course, you might also be able to find a better stock than Sichuan Zigong Conveying Machine Group. 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.