Nanjing Railway New Technology Co.,Ltd.'s (SZSE:301016) Shares Climb 26% But Its Business Is Yet to Catch Up

Nanjing Railway New Technology Co.,Ltd. (SZSE:301016) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Even after such a large jump in price, there still wouldn't be many who think Nanjing Railway New TechnologyLtd's price-to-earnings (or "P/E") ratio of 28.5x is worth a mention when the median P/E in China is similar at about 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Nanjing Railway New TechnologyLtd's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Nanjing Railway New TechnologyLtd

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 Nanjing Railway New TechnologyLtd's earnings, revenue and cash flow.

Is There Some Growth For Nanjing Railway New TechnologyLtd?

The only time you'd be comfortable seeing a P/E like Nanjing Railway New TechnologyLtd's is when the company's growth is tracking the market closely.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 24%. The last three years don't look nice either as the company has shrunk EPS by 54% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 41% 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 Nanjing Railway New TechnologyLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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 Key Takeaway

Nanjing Railway New TechnologyLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Nanjing Railway New TechnologyLtd currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 3 warning signs for Nanjing Railway New TechnologyLtd (2 are significant!) that you need to take into consideration.

You might be able to find a better investment than Nanjing Railway New TechnologyLtd. 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.