What Luoyang Northglass Technology Co.,Ltd's (SZSE:002613) 38% Share Price Gain Is Not Telling You

Luoyang Northglass Technology Co.,Ltd (SZSE:002613) shareholders are no doubt pleased to see that the share price has bounced 38% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Since its price has surged higher, Luoyang Northglass TechnologyLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 39.5x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings growth that's exceedingly strong of late, Luoyang Northglass TechnologyLtd has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Luoyang Northglass TechnologyLtd

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

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Luoyang Northglass TechnologyLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 54% last year. Pleasingly, EPS has also lifted 198% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's about the same on an annualised basis.

With this information, we find it interesting that Luoyang Northglass TechnologyLtd is trading at a high P/E compared to the market. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as a continuation of recent earnings trends would weigh down the share price eventually.

The Key Takeaway

The large bounce in Luoyang Northglass TechnologyLtd's shares has lifted the company's P/E to a fairly high level. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Luoyang Northglass TechnologyLtd currently trades on a higher than expected P/E since its recent three-year growth is only in line with the wider market forecast. Right now we are 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, it's challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Luoyang Northglass TechnologyLtd with six simple checks on some of these key factors.

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.