Tongling Nonferrous Metals Group Co.,Ltd. (SZSE:000630) Soars 26% But It's A Story Of Risk Vs Reward

Tongling Nonferrous Metals Group Co.,Ltd. (SZSE:000630) shareholders have had their patience rewarded with a 26% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

Even after such a large jump in price, Tongling Nonferrous Metals GroupLtd's price-to-earnings (or "P/E") ratio of 21x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 32x and even P/E's above 59x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Tongling Nonferrous Metals GroupLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Tongling Nonferrous Metals GroupLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tongling Nonferrous Metals GroupLtd.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as low as Tongling Nonferrous Metals GroupLtd's is when the company's growth is on track to lag the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 17%. Even so, admirably EPS has lifted 133% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 40% over the next year. Meanwhile, the rest of the market is forecast to expand by 37%, which is not materially different.

With this information, we find it odd that Tongling Nonferrous Metals GroupLtd is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

The latest share price surge wasn't enough to lift Tongling Nonferrous Metals GroupLtd's P/E close to the market median. 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.

We've established that Tongling Nonferrous Metals GroupLtd currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Tongling Nonferrous Metals GroupLtd that you should be aware of.

You might be able to find a better investment than Tongling Nonferrous Metals 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.