There's Reason For Concern Over Qingdao Tianneng Heavy Industries Co.,Ltd's (SZSE:300569) Massive 49% Price Jump

Qingdao Tianneng Heavy Industries Co.,Ltd (SZSE:300569) shareholders have had their patience rewarded with a 49% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Qingdao Tianneng Heavy IndustriesLtd's price-to-earnings (or "P/E") ratio of 31.5x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

For example, consider that Qingdao Tianneng Heavy IndustriesLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Qingdao Tianneng Heavy IndustriesLtd

Although there are no analyst estimates available for Qingdao Tianneng Heavy IndustriesLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Qingdao Tianneng Heavy IndustriesLtd's Growth Trending?

In order to justify its P/E ratio, Qingdao Tianneng Heavy IndustriesLtd would need to produce growth that's similar to the market.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 74% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

With this information, we find it concerning that Qingdao Tianneng Heavy IndustriesLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Qingdao Tianneng Heavy IndustriesLtd's P/E?

Its shares have lifted substantially and now Qingdao Tianneng Heavy IndustriesLtd's P/E is also back up to the market median. 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 Qingdao Tianneng Heavy IndustriesLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Qingdao Tianneng Heavy IndustriesLtd you should be aware of, and 2 of them don't sit too well with us.

If these risks are making you reconsider your opinion on Qingdao Tianneng Heavy IndustriesLtd, 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.