Baowu Magnesium Technology Co., Ltd. (SZSE:002182) Stocks Shoot Up 27% But Its P/E Still Looks Reasonable

Those holding Baowu Magnesium Technology Co., Ltd. (SZSE:002182) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 33% over that time.

Following the firm bounce in price, Baowu Magnesium Technology's price-to-earnings (or "P/E") ratio of 48.8x might make it look like a strong sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 18x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Baowu Magnesium Technology has been struggling lately as its earnings have declined faster 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.

See our latest analysis for Baowu Magnesium Technology

Want the full picture on analyst estimates for the company? Then our free report on Baowu Magnesium Technology will help you uncover what's on the horizon.

Is There Enough Growth For Baowu Magnesium Technology?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Baowu Magnesium Technology's to be considered reasonable.

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 71%. The last three years don't look nice either as the company has shrunk EPS by 61% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 172% as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 41% growth forecast for the broader market.

With this information, we can see why Baowu Magnesium Technology is trading at such a high P/E compared to the market. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

Baowu Magnesium Technology's P/E is flying high just like its stock has during the last month. 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.

As we suspected, our examination of Baowu Magnesium Technology'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.

Plus, you should also learn about these 4 warning signs we've spotted with Baowu Magnesium Technology (including 1 which is a bit concerning).

You might be able to find a better investment than Baowu Magnesium Technology. 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.