Nanjing Julong Science & Technology Co.,LTD's (SZSE:300644) 39% Share Price Surge Not Quite Adding Up

Nanjing Julong Science & Technology Co.,LTD (SZSE:300644) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 29%.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Nanjing Julong Science & TechnologyLTD's P/E ratio of 30.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. 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.

The earnings growth achieved at Nanjing Julong Science & TechnologyLTD over the last year would be more than acceptable for most companies. It might be that many expect the respectable 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.

Check out our latest analysis for Nanjing Julong Science & TechnologyLTD

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nanjing Julong Science & TechnologyLTD will help you shine a light on its historical performance.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Nanjing Julong Science & TechnologyLTD's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 19%. Pleasingly, EPS has also lifted 102% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 37% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

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

The Bottom Line On Nanjing Julong Science & TechnologyLTD's P/E

Its shares have lifted substantially and now Nanjing Julong Science & TechnologyLTD's P/E is also back up to the market median. 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 Nanjing Julong Science & TechnologyLTD revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Nanjing Julong Science & TechnologyLTD that you need to be mindful of.

Of course, you might also be able to find a better stock than Nanjing Julong Science & TechnologyLTD. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.