Optimistic Investors Push Zhejiang JW Precision Machinery Co.,Ltd (SZSE:300984) Shares Up 34% But Growth Is Lacking

The Zhejiang JW Precision Machinery Co.,Ltd (SZSE:300984) share price has done very well over the last month, posting an excellent gain of 34%. Notwithstanding the latest gain, the annual share price return of 8.6% isn't as impressive.

Since its price has surged higher, Zhejiang JW Precision MachineryLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 70.3x, since almost half of all companies in China have P/E ratios under 31x 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 highly elevated P/E.

For instance, Zhejiang JW Precision MachineryLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Zhejiang JW Precision MachineryLtd

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 Zhejiang JW Precision MachineryLtd's earnings, revenue and cash flow.

How Is Zhejiang JW Precision MachineryLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as steep as Zhejiang JW Precision MachineryLtd's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a frustrating 33% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 69% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Zhejiang JW Precision MachineryLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Zhejiang JW Precision MachineryLtd's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Zhejiang JW Precision MachineryLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Having said that, be aware Zhejiang JW Precision MachineryLtd is showing 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.