Nanjing Securities Co., Ltd.'s (SHSE:601990) Share Price Could Signal Some Risk

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Nanjing Securities Co., Ltd. (SHSE:601990) as a stock to potentially avoid with its 41.5x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Nanjing Securities' financial performance has been pretty ordinary lately as earnings growth is non-existent. One possibility is that the P/E is high because investors think the benign earnings growth will improve to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Nanjing Securities

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 Nanjing Securities' earnings, revenue and cash flow.

How Is Nanjing Securities' Growth Trending?

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

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. This isn't what shareholders were looking for as it means they've been left with a 23% decline in EPS over the last three years in total. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's an unpleasant look.

With this information, we find it concerning that Nanjing Securities is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Nanjing Securities' 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.

Our examination of Nanjing Securities 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 Nanjing Securities is showing 2 warning signs in our investment analysis, and 1 of those is potentially serious.

Of course, you might also be able to find a better stock than Nanjing Securities. 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.