Earnings Not Telling The Story For HuBei NengTer Technology CO.,Ltd (SZSE:002102) After Shares Rise 27%

HuBei NengTer Technology CO.,Ltd (SZSE:002102) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.8% over the last year.

Since its price has surged higher, HuBei NengTer TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 31.3x, since almost half of all companies in China have P/E ratios under 27x and even P/E's lower than 16x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

As an illustration, earnings have deteriorated at HuBei NengTer TechnologyLtd over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for HuBei NengTer TechnologyLtd

Although there are no analyst estimates available for HuBei NengTer TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is HuBei NengTer TechnologyLtd's Growth Trending?

In order to justify its P/E ratio, HuBei NengTer TechnologyLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 106% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome 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 36% shows it's noticeably less attractive on an annualised basis.

In light of this, it's alarming that HuBei NengTer TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From HuBei NengTer TechnologyLtd's P/E?

HuBei NengTer TechnologyLtd shares have received a push in the right direction, but its P/E is elevated too. 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 HuBei NengTer TechnologyLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with HuBei NengTer TechnologyLtd, and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than HuBei NengTer TechnologyLtd. 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.