Nanxing Machinery Co., Ltd. (SZSE:002757) Shares Fly 25% But Investors Aren't Buying For Growth

Those holding Nanxing Machinery Co., Ltd. (SZSE:002757) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 3.0% isn't as impressive.

In spite of the firm bounce in price, Nanxing Machinery's price-to-earnings (or "P/E") ratio of 13.4x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 31x and even P/E's above 56x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings growth that's exceedingly strong of late, Nanxing Machinery has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Nanxing Machinery

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 Nanxing Machinery's earnings, revenue and cash flow.

Is There Any Growth For Nanxing Machinery?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Nanxing Machinery's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 31% last year. Pleasingly, EPS has also lifted 31% 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.

This is in contrast to the rest of the market, which is expected to grow by 42% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Nanxing Machinery's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Nanxing Machinery's P/E?

Nanxing Machinery's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Nanxing Machinery revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Nanxing Machinery you should know about.

If these risks are making you reconsider your opinion on Nanxing Machinery, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.