Further Upside For Henan Liliang Diamond Co., Ltd. (SZSE:301071) Shares Could Introduce Price Risks After 35% Bounce

Henan Liliang Diamond Co., Ltd. (SZSE:301071) shares have continued their recent momentum with a 35% gain in the last month alone. Looking further back, the 16% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, there still wouldn't be many who think Henan Liliang Diamond's price-to-earnings (or "P/E") ratio of 33x is worth a mention when the median P/E in China is similar at about 37x. 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.

Henan Liliang Diamond 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 revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Henan Liliang Diamond

Want the full picture on analyst estimates for the company? Then our free report on Henan Liliang Diamond will help you uncover what's on the horizon.

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

Henan Liliang Diamond's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 6.5% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 49% during the coming year according to the only analyst following the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we find it interesting that Henan Liliang Diamond is trading at a fairly similar P/E to the market. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

Henan Liliang Diamond's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Henan Liliang Diamond's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing pressure on the P/E ratio. It appears some are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Henan Liliang Diamond you should know about.

You might be able to find a better investment than Henan Liliang Diamond. 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.