Fujian Nanping Sun Cable Co., Ltd.'s (SZSE:002300) Shares Climb 31% But Its Business Is Yet to Catch Up

Fujian Nanping Sun Cable Co., Ltd. (SZSE:002300) shareholders have had their patience rewarded with a 31% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 5.8% isn't as attractive.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider Fujian Nanping Sun Cable as a stock to potentially avoid with its 44.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

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For instance, Fujian Nanping Sun Cable's receding earnings in recent times would have to be some food for thought. 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.

View our latest analysis for Fujian Nanping Sun Cable

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How Is Fujian Nanping Sun Cable's Growth Trending?

In order to justify its P/E ratio, Fujian Nanping Sun Cable would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 50%. This means it has also seen a slide in earnings over the longer-term as EPS is down 28% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that Fujian Nanping Sun Cable is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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 Final Word

Fujian Nanping Sun Cable's P/E is getting right up there since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Fujian Nanping Sun Cable currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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 4 warning signs with Fujian Nanping Sun Cable (at least 2 which are potentially serious), and understanding these should be part of your investment process.

If you're unsure about the strength of Fujian Nanping Sun Cable's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.