After Leaping 26% Nanjing Xinjiekou Department Store Co., Ltd. (SHSE:600682) Shares Are Not Flying Under The Radar

Despite an already strong run, Nanjing Xinjiekou Department Store Co., Ltd. (SHSE:600682) shares have been powering on, with a gain of 26% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 2.3% isn't as attractive.

Since its price has surged higher, Nanjing Xinjiekou Department Store's price-to-earnings (or "P/E") ratio of 43.6x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 37x and even P/E's below 21x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

With earnings that are retreating more than the market's of late, Nanjing Xinjiekou Department Store has been very sluggish. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Nanjing Xinjiekou Department Store

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Nanjing Xinjiekou Department Store.

Does Growth Match The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Nanjing Xinjiekou Department Store's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 50%. As a result, earnings from three years ago have also fallen 75% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 115% as estimated by the sole analyst watching the company. Meanwhile, the rest of the market is forecast to only expand by 38%, which is noticeably less attractive.

With this information, we can see why Nanjing Xinjiekou Department Store is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

The large bounce in Nanjing Xinjiekou Department Store's shares has lifted the company's P/E to a fairly high level. 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.

We've established that Nanjing Xinjiekou Department Store maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Nanjing Xinjiekou Department Store that you should be aware of.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.