Improved Earnings Required Before Shandong Nanshan Fashion Sci-Tech Co., Ltd. (SZSE:300918) Stock's 26% Jump Looks Justified

Despite an already strong run, Shandong Nanshan Fashion Sci-Tech Co., Ltd. (SZSE:300918) shares have been powering on, with a gain of 26% in the last thirty days. Looking further back, the 21% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

In spite of the firm bounce in price, Shandong Nanshan Fashion Sci-Tech's price-to-earnings (or "P/E") ratio of 21.4x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 37x and even P/E's above 73x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shandong Nanshan Fashion Sci-Tech has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Shandong Nanshan Fashion Sci-Tech

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Shandong Nanshan Fashion Sci-Tech would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 3.7% gain to the company's bottom line. The latest three year period has also seen an excellent 87% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 24% during the coming year according to the three analysts following the company. Meanwhile, the rest of the market is forecast to expand by 39%, which is noticeably more attractive.

In light of this, it's understandable that Shandong Nanshan Fashion Sci-Tech's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Shandong Nanshan Fashion Sci-Tech's P/E?

Shandong Nanshan Fashion Sci-Tech's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Shandong Nanshan Fashion Sci-Tech maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Shandong Nanshan Fashion Sci-Tech (2 can't be ignored!) that we have uncovered.

Of course, you might also be able to find a better stock than Shandong Nanshan Fashion Sci-Tech. 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.