Optimistic Investors Push Jiangsu Leili Motor Co., Ltd (SZSE:300660) Shares Up 26% But Growth Is Lacking

Jiangsu Leili Motor Co., Ltd (SZSE:300660) shares have continued their recent momentum with a 26% gain in the last month alone. The last month tops off a massive increase of 113% in the last year.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Jiangsu Leili Motor as a stock to potentially avoid with its 47.2x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Jiangsu Leili Motor has been doing quite well of late. 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 Jiangsu Leili Motor

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Jiangsu Leili Motor.

Does Growth Match The High P/E?

Jiangsu Leili Motor's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. Fortunately, a few good years before that means that it was still able to grow EPS by 8.5% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 35% over the next year. That's shaping up to be similar to the 38% growth forecast for the broader market.

With this information, we find it interesting that Jiangsu Leili Motor is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Jiangsu Leili Motor's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Jiangsu Leili Motor currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Jiangsu Leili Motor has 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

You might be able to find a better investment than Jiangsu Leili Motor. 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.