What Qinhuangdao Tianqin Equipment Manufacturing Co.,Ltd.'s (SZSE:300922) 28% Share Price Gain Is Not Telling You

Qinhuangdao Tianqin Equipment Manufacturing Co.,Ltd. (SZSE:300922) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 40% in the last year.

After such a large jump in price, Qinhuangdao Tianqin Equipment ManufacturingLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 68.6x, since almost half of all companies in China have P/E ratios under 39x and even P/E's lower than 22x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

With earnings growth that's exceedingly strong of late, Qinhuangdao Tianqin Equipment ManufacturingLtd has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Qinhuangdao Tianqin Equipment ManufacturingLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Qinhuangdao Tianqin Equipment ManufacturingLtd's earnings, revenue and cash flow.

How Is Qinhuangdao Tianqin Equipment ManufacturingLtd's Growth Trending?

In order to justify its P/E ratio, Qinhuangdao Tianqin Equipment ManufacturingLtd would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 92%. However, this wasn't enough as the latest three year period has seen a very unpleasant 50% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Qinhuangdao Tianqin Equipment ManufacturingLtd is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very 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.

The Bottom Line On Qinhuangdao Tianqin Equipment ManufacturingLtd's P/E

Shares in Qinhuangdao Tianqin Equipment ManufacturingLtd have built up some good momentum lately, which has really inflated its P/E. 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 Qinhuangdao Tianqin Equipment ManufacturingLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 2 warning signs for Qinhuangdao Tianqin Equipment ManufacturingLtd (1 is significant!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.