RongFa Nuclear Equipment Co., Ltd.'s (SZSE:002366) Shares Climb 30% But Its Business Is Yet to Catch Up

RongFa Nuclear Equipment Co., Ltd. (SZSE:002366) shares have continued their recent momentum with a 30% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.1% over the last year.

After such a large jump in price, RongFa Nuclear Equipment may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 53.8x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 21x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at RongFa Nuclear Equipment 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for RongFa Nuclear Equipment

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 RongFa Nuclear Equipment's earnings, revenue and cash flow.

Is There Enough Growth For RongFa Nuclear Equipment?

In order to justify its P/E ratio, RongFa Nuclear Equipment would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 48% decrease to the company's bottom line. Unfortunately, that's brought it right back to where it started three years ago with EPS growth being virtually non-existent overall during that time. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that RongFa Nuclear Equipment's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

The Bottom Line On RongFa Nuclear Equipment's P/E

RongFa Nuclear Equipment shares have received a push in the right direction, but its P/E is elevated too. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that RongFa Nuclear Equipment currently trades on a much higher than expected P/E since its recent three-year growth is lower than the wider market forecast. 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.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for RongFa Nuclear Equipment (1 makes us a bit uncomfortable) you should be aware of.

If you're unsure about the strength of RongFa Nuclear Equipment'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.