Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd. (SZSE:002896) Not Lagging Market On Growth Or Pricing

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd. (SZSE:002896) as a stock to avoid entirely with its 62.2x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Ningbo ZhongDa Leader Intelligent Transmission has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Ningbo ZhongDa Leader Intelligent Transmission

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ningbo ZhongDa Leader Intelligent Transmission.

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

In order to justify its P/E ratio, Ningbo ZhongDa Leader Intelligent Transmission would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 10%. As a result, earnings from three years ago have also fallen 18% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 50% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 40%, which is noticeably less attractive.

In light of this, it's understandable that Ningbo ZhongDa Leader Intelligent Transmission's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Ningbo ZhongDa Leader Intelligent Transmission's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Ningbo ZhongDa Leader Intelligent Transmission's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Plus, you should also learn about this 1 warning sign we've spotted with Ningbo ZhongDa Leader Intelligent Transmission.

You might be able to find a better investment than Ningbo ZhongDa Leader Intelligent Transmission. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.