A Piece Of The Puzzle Missing From Dajin Heavy Industry Co.,Ltd.'s (SZSE:002487) 37% Share Price Climb

Those holding Dajin Heavy Industry Co.,Ltd. (SZSE:002487) shares would be relieved that the share price has rebounded 37% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 39% in the last twelve months.

In spite of the firm bounce in price, there still wouldn't be many who think Dajin Heavy IndustryLtd's price-to-earnings (or "P/E") ratio of 27.7x is worth a mention when the median P/E in China is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

There hasn't been much to differentiate Dajin Heavy IndustryLtd's and the market's retreating earnings lately. It seems that few are expecting the company's earnings performance to deviate much from most other companies, which has held the P/E back. You'd much rather the company wasn't bleeding earnings if you still believe in the business. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's earnings continue tracking the market.

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What Are Growth Metrics Telling Us About The P/E?

Dajin Heavy IndustryLtd's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Taking a look back first, we see that there was hardly any earnings per share growth to speak of for the company over the past year. Regardless, EPS has managed to lift by a handy 24% in aggregate from three years ago, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 85% during the coming year according to the two analysts following the company. Meanwhile, the rest of the market is forecast to only expand by 41%, which is noticeably less attractive.

With this information, we find it interesting that Dajin Heavy IndustryLtd is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Key Takeaway

Dajin Heavy IndustryLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Dajin Heavy IndustryLtd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 1 warning sign for Dajin Heavy IndustryLtd that you should be aware of.

Of course, you might also be able to find a better stock than Dajin Heavy IndustryLtd. 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.