There's Reason For Concern Over Harbin Jiuzhou Group Co.,Ltd.'s (SZSE:300040) Massive 41% Price Jump

The Harbin Jiuzhou Group Co.,Ltd. (SZSE:300040) share price has done very well over the last month, posting an excellent gain of 41%. Looking back a bit further, it's encouraging to see the stock is up 27% in the last year.

Even after such a large jump in price, there still wouldn't be many who think Harbin Jiuzhou GroupLtd's price-to-earnings (or "P/E") ratio of 36.6x is worth a mention when the median P/E in China is similar at about 34x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been pleasing for Harbin Jiuzhou GroupLtd as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Harbin Jiuzhou GroupLtd

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

In order to justify its P/E ratio, Harbin Jiuzhou GroupLtd would need to produce growth that's similar to the market.

If we review the last year of earnings growth, the company posted a worthy increase of 4.7%. Still, lamentably EPS has fallen 6.5% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 17% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

In light of this, it's curious that Harbin Jiuzhou GroupLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Harbin Jiuzhou GroupLtd's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Harbin Jiuzhou GroupLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Harbin Jiuzhou GroupLtd (2 are a bit unpleasant!) that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.