Nanfang Zhongjin Environment Co., Ltd. (SZSE:300145) Soars 28% But It's A Story Of Risk Vs Reward

The Nanfang Zhongjin Environment Co., Ltd. (SZSE:300145) share price has done very well over the last month, posting an excellent gain of 28%. Looking back a bit further, it's encouraging to see the stock is up 73% in the last year.

Although its price has surged higher, it's still not a stretch to say that Nanfang Zhongjin Environment's price-to-earnings (or "P/E") ratio of 35.6x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 38x. 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.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Nanfang Zhongjin Environment has been doing quite well of late. 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.

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

The only time you'd be comfortable seeing a P/E like Nanfang Zhongjin Environment's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a decent 14% gain to the company's bottom line. Although, the latest three year period in total hasn't been as good as it didn't manage to provide any growth at all. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Turning to the outlook, the next year should generate growth of 57% as estimated by the one analyst watching the company. With the market only predicted to deliver 37%, the company is positioned for a stronger earnings result.

With this information, we find it interesting that Nanfang Zhongjin Environment is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Nanfang Zhongjin Environment appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Nanfang Zhongjin Environment currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you take the next step, you should know about the 3 warning signs for Nanfang Zhongjin Environment that we have uncovered.

If you're unsure about the strength of Nanfang Zhongjin Environment'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.