MCLON JEWELLERY Co.,Ltd.'s (SZSE:300945) 29% Share Price Surge Not Quite Adding Up

MCLON JEWELLERY Co.,Ltd. (SZSE:300945) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 5.3% over the last year.

After such a large jump in price, MCLON JEWELLERYLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45.7x, since almost half of all companies in China have P/E ratios under 29x 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 so lofty.

MCLON JEWELLERYLtd certainly has been doing a good job lately as it's been growing earnings more than most other companies. It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. If not, then existing shareholders might be a little nervous about the viability of the share price.

View our latest analysis for MCLON JEWELLERYLtd

Want the full picture on analyst estimates for the company? Then our free report on MCLON JEWELLERYLtd will help you uncover what's on the horizon.

How Is MCLON JEWELLERYLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like MCLON JEWELLERYLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 19% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 38% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 16% over the next year. Meanwhile, the rest of the market is forecast to expand by 36%, which is noticeably more attractive.

In light of this, it's alarming that MCLON JEWELLERYLtd's P/E sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From MCLON JEWELLERYLtd's P/E?

MCLON JEWELLERYLtd's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of MCLON JEWELLERYLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for MCLON JEWELLERYLtd (of which 1 is potentially serious!) you should know about.

If you're unsure about the strength of MCLON JEWELLERYLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.