Why Investors Shouldn't Be Surprised By JiangSu JiuWu Hi-Tech Co., Ltd.'s (SZSE:300631) 37% Share Price Surge

JiangSu JiuWu Hi-Tech Co., Ltd. (SZSE:300631) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 33x, you may consider JiangSu JiuWu Hi-Tech as a stock to avoid entirely with its 55.5x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for JiangSu JiuWu Hi-Tech as its earnings have risen in spite of the market's earnings going into reverse. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for JiangSu JiuWu Hi-Tech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on JiangSu JiuWu Hi-Tech.

What Are Growth Metrics Telling Us About The High P/E?

The only time you'd be truly comfortable seeing a P/E as steep as JiangSu JiuWu Hi-Tech's is when the company's growth is on track to outshine the market decidedly.

Retrospectively, the last year delivered a decent 9.5% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 41% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the sole analyst covering the company suggest earnings should grow by 54% per annum over the next three years. Meanwhile, the rest of the market is forecast to only expand by 19% each year, which is noticeably less attractive.

With this information, we can see why JiangSu JiuWu Hi-Tech is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On JiangSu JiuWu Hi-Tech's P/E

Shares in JiangSu JiuWu Hi-Tech have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that JiangSu JiuWu Hi-Tech 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for JiangSu JiuWu Hi-Tech you should be aware of.

You might be able to find a better investment than JiangSu JiuWu Hi-Tech. 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.