Improved Earnings Required Before Henan Jindan Lactic Acid Technology Co.,Ltd. (SZSE:300829) Stock's 28% Jump Looks Justified

Henan Jindan Lactic Acid Technology Co.,Ltd. (SZSE:300829) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Henan Jindan Lactic Acid TechnologyLtd as an attractive investment with its 22.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

For instance, Henan Jindan Lactic Acid TechnologyLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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 out of favour.

Check out our latest analysis for Henan Jindan Lactic Acid TechnologyLtd

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 Henan Jindan Lactic Acid TechnologyLtd's earnings, revenue and cash flow.

How Is Henan Jindan Lactic Acid TechnologyLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Henan Jindan Lactic Acid TechnologyLtd's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 7.0% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 17% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 41% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we are not surprised that Henan Jindan Lactic Acid TechnologyLtd is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Henan Jindan Lactic Acid TechnologyLtd's P/E?

Henan Jindan Lactic Acid TechnologyLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Henan Jindan Lactic Acid TechnologyLtd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Henan Jindan Lactic Acid TechnologyLtd (at least 1 which is a bit unpleasant), and understanding them should be part of your investment process.

If you're unsure about the strength of Henan Jindan Lactic Acid TechnologyLtd'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.