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

When close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider China Northern Rare Earth (Group) High-Tech Co.,Ltd (SHSE:600111) as a stock to avoid entirely with its 59.9x 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.

With earnings that are retreating more than the market's of late, China Northern Rare Earth (Group) High-TechLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Is There Enough Growth For China Northern Rare Earth (Group) High-TechLtd?

In order to justify its P/E ratio, China Northern Rare Earth (Group) High-TechLtd would need to produce outstanding growth well in excess of the market.

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. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 55% during the coming year according to the six analysts following 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 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.

The Key Takeaway

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. 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 1 warning sign for China Northern Rare Earth (Group) High-TechLtd that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.