Why Investors Shouldn't Be Surprised By Ningxia Building Materials Group Co.,Ltd's (SHSE:600449) 26% Share Price Surge

Ningxia Building Materials Group Co.,Ltd (SHSE:600449) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Taking a wider view, although not as strong as the last month, the full year gain of 21% is also fairly reasonable.

Following the firm bounce in price, Ningxia Building Materials GroupLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 38.3x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 18x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

Recent times haven't been advantageous for Ningxia Building Materials GroupLtd as its earnings have been falling quicker than most other companies. 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 Ningxia Building Materials GroupLtd

Keen to find out how analysts think Ningxia Building Materials GroupLtd's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should outperform the market for P/E ratios like Ningxia Building Materials GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 68% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 77% 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 291% during the coming year according to the two analysts following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

With this information, we can see why Ningxia Building Materials GroupLtd 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

Ningxia Building Materials GroupLtd's P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Ningxia Building Materials GroupLtd's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. 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.

You should always think about risks. Case in point, we've spotted 3 warning signs for Ningxia Building Materials GroupLtd you should be aware of.

You might be able to find a better investment than Ningxia Building Materials GroupLtd. 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).

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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.