Guangdong JingYi Metal CO.,Ltd's (SZSE:002295) Shares Climb 42% But Its Business Is Yet to Catch Up

Those holding Guangdong JingYi Metal CO.,Ltd (SZSE:002295) shares would be relieved that the share price has rebounded 42% 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 19% over that time.

Since its price has surged higher, Guangdong JingYi MetalLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 75.8x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. 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.

For example, consider that Guangdong JingYi MetalLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Guangdong JingYi MetalLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Guangdong JingYi MetalLtd's earnings, revenue and cash flow.

How Is Guangdong JingYi MetalLtd's Growth Trending?

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

Retrospectively, the last year delivered a frustrating 51% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 42% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Guangdong JingYi MetalLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Guangdong JingYi MetalLtd's P/E?

Shares in Guangdong JingYi MetalLtd have built up some good momentum lately, which has really inflated its P/E. 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.

Our examination of Guangdong JingYi MetalLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Guangdong JingYi MetalLtd (of which 1 shouldn't be ignored!) you should know about.

If you're unsure about the strength of Guangdong JingYi MetalLtd'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.