China Northern Rare Earth (Group) High-Tech Co.,Ltd's (SHSE:600111) 29% Jump Shows Its Popularity With Investors

China Northern Rare Earth (Group) High-Tech Co.,Ltd (SHSE:600111) shares have continued their recent momentum with a 29% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 35x, you may consider China Northern Rare Earth (Group) High-TechLtd as a stock to avoid entirely with its 69x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times haven't been advantageous for China Northern Rare Earth (Group) High-TechLtd as its earnings have been falling quicker than most other companies. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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How Is China Northern Rare Earth (Group) High-TechLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like China Northern Rare Earth (Group) High-TechLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 60% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 95% as estimated by the five analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

With this information, we can see why China Northern Rare Earth (Group) High-TechLtd 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.

What We Can Learn From China Northern Rare Earth (Group) High-TechLtd's P/E?

The strong share price surge has got China Northern Rare Earth (Group) High-TechLtd's P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for China Northern Rare Earth (Group) High-TechLtd you should be aware of.

If these risks are making you reconsider your opinion on China Northern Rare Earth (Group) High-TechLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.