Improved Earnings Required Before Shandong Nanshan Fashion Sci-Tech Co., Ltd. (SZSE:300918) Stock's 25% Jump Looks Justified

Shandong Nanshan Fashion Sci-Tech Co., Ltd. (SZSE:300918) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Looking back a bit further, it's encouraging to see the stock is up 39% in the last year.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 37x, you may still consider Shandong Nanshan Fashion Sci-Tech as an attractive investment with its 20.7x P/E ratio. 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 you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Shandong Nanshan Fashion Sci-Tech

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shandong Nanshan Fashion Sci-Tech.

Is There Any Growth For Shandong Nanshan Fashion Sci-Tech?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shandong Nanshan Fashion Sci-Tech's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.7% gain to the company's bottom line. Pleasingly, EPS has also lifted 87% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 24% as estimated by the three analysts watching the company. That's shaping up to be materially lower than the 38% growth forecast for the broader market.

In light of this, it's understandable that Shandong Nanshan Fashion Sci-Tech's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Shandong Nanshan Fashion Sci-Tech's P/E close to the market median. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Shandong Nanshan Fashion Sci-Tech (2 can't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Shandong Nanshan Fashion Sci-Tech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.