Earnings Tell The Story For Nanjing Develop Advanced Manufacturing Co., Ltd. (SHSE:688377) As Its Stock Soars 34%

Despite an already strong run, Nanjing Develop Advanced Manufacturing Co., Ltd. (SHSE:688377) shares have been powering on, with a gain of 34% in the last thirty days. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

After such a large jump in price, Nanjing Develop Advanced Manufacturing may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 47.9x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 20x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Nanjing Develop Advanced Manufacturing has been very sluggish. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.

Check out our latest analysis for Nanjing Develop Advanced Manufacturing

Want the full picture on analyst estimates for the company? Then our free report on Nanjing Develop Advanced Manufacturing will help you uncover what's on the horizon.

Is There Enough Growth For Nanjing Develop Advanced Manufacturing?

The only time you'd be truly comfortable seeing a P/E as high as Nanjing Develop Advanced Manufacturing's is when the company's growth is on track to outshine the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 44%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 118% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 89% during the coming year according to the lone analyst following the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

With this information, we can see why Nanjing Develop Advanced Manufacturing is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Nanjing Develop Advanced Manufacturing shares have received a push in the right direction, but its P/E is elevated too. 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.

As we suspected, our examination of Nanjing Develop Advanced Manufacturing's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Nanjing Develop Advanced Manufacturing that we have uncovered.

You might be able to find a better investment than Nanjing Develop Advanced Manufacturing. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.