Market Participants Recognise Chengdu ALD Aviation Manufacturing Corporation's (SZSE:300696) Earnings Pushing Shares 28% Higher

Those holding Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 50% in the last twelve months.

After such a large jump in price, Chengdu ALD Aviation Manufacturing may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 36.8x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Chengdu ALD Aviation Manufacturing as its earnings have been falling quicker than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Chengdu ALD Aviation Manufacturing

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How Is Chengdu ALD Aviation Manufacturing's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Chengdu ALD Aviation Manufacturing's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 4.4% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest earnings should grow by 446% over the next year. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

With this information, we can see why Chengdu ALD Aviation Manufacturing is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What We Can Learn From Chengdu ALD Aviation Manufacturing's P/E?

Chengdu ALD Aviation Manufacturing shares have received a push in the right direction, but its P/E is elevated too. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Chengdu ALD Aviation Manufacturing's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Chengdu ALD Aviation Manufacturing that you should be aware of.

If these risks are making you reconsider your opinion on Chengdu ALD Aviation Manufacturing, 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.