Earnings Not Telling The Story For Liaoning Fu-An Heavy Industry Co.,Ltd (SHSE:603315) After Shares Rise 29%

The Liaoning Fu-An Heavy Industry Co.,Ltd (SHSE:603315) share price has done very well over the last month, posting an excellent gain of 29%. Taking a wider view, although not as strong as the last month, the full year gain of 24% is also fairly reasonable.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 38x, you may consider Liaoning Fu-An Heavy IndustryLtd as a stock to potentially avoid with its 43.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

With earnings growth that's exceedingly strong of late, Liaoning Fu-An Heavy IndustryLtd has been doing very well. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Liaoning Fu-An Heavy IndustryLtd

Although there are no analyst estimates available for Liaoning Fu-An Heavy IndustryLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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 Liaoning Fu-An Heavy IndustryLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 61%. The latest three year period has also seen a 24% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Liaoning Fu-An Heavy IndustryLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Final Word

The large bounce in Liaoning Fu-An Heavy IndustryLtd's shares has lifted the company's P/E to a fairly high level. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Liaoning Fu-An Heavy IndustryLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Liaoning Fu-An Heavy IndustryLtd (of which 1 doesn't sit too well with us!) you should know about.

If these risks are making you reconsider your opinion on Liaoning Fu-An Heavy IndustryLtd, 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.