Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd.'s (SZSE:002896) 26% Share Price Surge Not Quite Adding Up

Those holding Ningbo ZhongDa Leader Intelligent Transmission Co., Ltd. (SZSE:002896) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Since its price has surged higher, Ningbo ZhongDa Leader Intelligent Transmission's price-to-earnings (or "P/E") ratio of 62x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 30x and even P/E's below 18x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been pleasing for Ningbo ZhongDa Leader Intelligent Transmission as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ningbo ZhongDa Leader Intelligent Transmission

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How Is Ningbo ZhongDa Leader Intelligent Transmission's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Ningbo ZhongDa Leader Intelligent Transmission's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered an exceptional 34% gain to the company's bottom line. Still, incredibly EPS has fallen 7.8% in total from three years ago, which is quite disappointing. 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 26% as estimated by the only analyst watching the company. Meanwhile, the rest of the market is forecast to expand by 41%, which is noticeably more attractive.

With this information, we find it concerning that Ningbo ZhongDa Leader Intelligent Transmission is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

What We Can Learn From Ningbo ZhongDa Leader Intelligent Transmission's P/E?

Ningbo ZhongDa Leader Intelligent Transmission's P/E is flying high just like its stock has during the last month. 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 Ningbo ZhongDa Leader Intelligent Transmission currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Ningbo ZhongDa Leader Intelligent Transmission that you need to take into consideration.

If you're unsure about the strength of Ningbo ZhongDa Leader Intelligent Transmission'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.