A Piece Of The Puzzle Missing From Nanjing Xinjiekou Department Store Co., Ltd.'s (SHSE:600682) 28% Share Price Climb

The Nanjing Xinjiekou Department Store Co., Ltd. (SHSE:600682) share price has done very well over the last month, posting an excellent gain of 28%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.3% over the last year.

In spite of the firm bounce in price, Nanjing Xinjiekou Department Store's price-to-earnings (or "P/E") ratio of 27.1x 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 33x and even P/E's above 63x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Nanjing Xinjiekou Department Store could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Nanjing Xinjiekou Department Store

Keen to find out how analysts think Nanjing Xinjiekou Department Store's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Nanjing Xinjiekou Department Store?

In order to justify its P/E ratio, Nanjing Xinjiekou Department Store would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 54% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 56% during the coming year according to the only analyst following the company. With the market only predicted to deliver 38%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Nanjing Xinjiekou Department Store's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Nanjing Xinjiekou Department Store's P/E?

Despite Nanjing Xinjiekou Department Store's shares building up a head of steam, its P/E still lags most other companies. 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 Nanjing Xinjiekou Department Store currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Nanjing Xinjiekou Department Store you should be aware of.

You might be able to find a better investment than Nanjing Xinjiekou Department Store. 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).

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.