Why Investors Shouldn't Be Surprised By Naipu Mining Machinery Co., Ltd.'s (SZSE:300818) 42% Share Price Surge

Naipu Mining Machinery Co., Ltd. (SZSE:300818) shares have had a really impressive month, gaining 42% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 49% in the last year.

After such a large jump in price, Naipu Mining Machinery may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Naipu Mining Machinery 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for Naipu Mining Machinery

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Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Naipu Mining Machinery's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 62%. The latest three year period has also seen an excellent 42% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 37% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% per year, which is noticeably less attractive.

With this information, we can see why Naipu Mining Machinery 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.

The Key Takeaway

Naipu Mining Machinery's P/E is getting right up there since its shares have risen strongly. 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 Naipu Mining Machinery maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. 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.

It is also worth noting that we have found 2 warning signs for Naipu Mining Machinery (1 doesn't sit too well with us!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Naipu Mining Machinery, 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.