China Northern Rare Earth (Group) High-Tech Co.,Ltd's (SHSE:600111) Popularity With Investors Is Clear

China Northern Rare Earth (Group) High-Tech Co.,Ltd's (SHSE:600111) price-to-earnings (or "P/E") ratio of 40.8x 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 27x and even P/E's below 16x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

China Northern Rare Earth (Group) High-TechLtd hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

View our latest analysis for China Northern Rare Earth (Group) High-TechLtd

Keen to find out how analysts think China Northern Rare Earth (Group) High-TechLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

China Northern Rare Earth (Group) High-TechLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 72%. This means it has also seen a slide in earnings over the longer-term as EPS is down 5.8% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Looking ahead now, EPS is anticipated to climb by 44% per annum during the coming three years according to the five analysts following the company. With the market only predicted to deliver 24% each year, the company is positioned for a stronger earnings result.

In light of this, it's understandable that China Northern Rare Earth (Group) High-TechLtd's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

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 China Northern Rare Earth (Group) High-TechLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 1 warning sign for China Northern Rare Earth (Group) High-TechLtd that you need to be mindful 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.

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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.