Sinomach Precision Industry Group Co., Ltd.'s (SZSE:002046) 34% Price Boost Is Out Of Tune With Earnings

Despite an already strong run, Sinomach Precision Industry Group Co., Ltd. (SZSE:002046) shares have been powering on, with a gain of 34% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 84% in the last year.

Although its price has surged higher, there still wouldn't be many who think Sinomach Precision Industry Group's price-to-earnings (or "P/E") ratio of 41.7x is worth a mention when the median P/E in China is similar at about 38x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For example, consider that Sinomach Precision Industry Group's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Sinomach Precision Industry Group

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sinomach Precision Industry Group will help you shine a light on its historical performance.

How Is Sinomach Precision Industry Group's Growth Trending?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 19%. That put a dampener on the good run it was having over the longer-term as its three-year EPS growth is still a noteworthy 22% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's noticeably less attractive on an annualised basis.

With this information, we find it interesting that Sinomach Precision Industry Group is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

What We Can Learn From Sinomach Precision Industry Group's P/E?

Sinomach Precision Industry Group appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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.

Our examination of Sinomach Precision Industry Group revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely 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.

You always need to take note of risks, for example - Sinomach Precision Industry Group has 3 warning signs we think you should be aware of.

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.