Jinhong Gas Co.,Ltd.'s (SHSE:688106) Popularity With Investors Is Under Threat From Overpricing

With a median price-to-earnings (or "P/E") ratio of close to 30x in China, you could be forgiven for feeling indifferent about Jinhong Gas Co.,Ltd.'s (SHSE:688106) P/E ratio of 27.1x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

With earnings growth that's superior to most other companies of late, Jinhong GasLtd has been doing relatively well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Jinhong GasLtd

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Is There Some Growth For Jinhong GasLtd?

The only time you'd be comfortable seeing a P/E like Jinhong GasLtd's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered an exceptional 36% gain to the company's bottom line. The latest three year period has also seen an excellent 46% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 20% per annum during the coming three years according to the eight analysts following the company. With the market predicted to deliver 25% growth per year, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Jinhong GasLtd is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Bottom Line On Jinhong GasLtd's P/E

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Jinhong GasLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with Jinhong GasLtd (including 1 which shouldn't be ignored).

If you're unsure about the strength of Jinhong GasLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com