HangZhou Nbond Nonwovens Co., Ltd.'s (SHSE:603238) 29% Price Boost Is Out Of Tune With Earnings

HangZhou Nbond Nonwovens Co., Ltd. (SHSE:603238) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, despite the strong performance over the last month, the full year gain of 2.1% isn't as attractive.

Following the firm bounce in price, HangZhou Nbond Nonwovens may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 35.3x, 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. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's exceedingly strong of late, HangZhou Nbond Nonwovens 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.

Check out our latest analysis for HangZhou Nbond Nonwovens

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 HangZhou Nbond Nonwovens' earnings, revenue and cash flow.

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

In order to justify its P/E ratio, HangZhou Nbond Nonwovens would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 106% gain to the company's bottom line. Still, incredibly EPS has fallen 74% in total from three years ago, which is quite disappointing. 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 40% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that HangZhou Nbond Nonwovens' 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. 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.

What We Can Learn From HangZhou Nbond Nonwovens' P/E?

HangZhou Nbond Nonwovens' 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.

Our examination of HangZhou Nbond Nonwovens 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. 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.

Having said that, be aware HangZhou Nbond Nonwovens is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

Of course, you might also be able to find a better stock than HangZhou Nbond Nonwovens. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.