Optimistic Investors Push Ningbo Joy Intelligent Logistics Technology Co.,Ltd. (SZSE:301198) Shares Up 27% But Growth Is Lacking

Ningbo Joy Intelligent Logistics Technology Co.,Ltd. (SZSE:301198) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

Since its price has surged higher, Ningbo Joy Intelligent Logistics TechnologyLtd's price-to-earnings (or "P/E") ratio of 48.3x 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 27x and even P/E's below 16x are quite common. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

While the market has experienced earnings growth lately, Ningbo Joy Intelligent Logistics TechnologyLtd's earnings have gone into reverse gear, which is not great. It might be that many expect the dour earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Ningbo Joy Intelligent Logistics TechnologyLtd

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Does Growth Match The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Ningbo Joy Intelligent Logistics TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 52% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 61% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 23% per annum over the next three years. That's shaping up to be similar to the 24% per year growth forecast for the broader market.

With this information, we find it interesting that Ningbo Joy Intelligent Logistics TechnologyLtd is trading at a high P/E compared to the market. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/E falls to levels more in line with the growth outlook.

The Final Word

Ningbo Joy Intelligent Logistics TechnologyLtd's P/E is flying high just like its stock has during the last month. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Ningbo Joy Intelligent Logistics TechnologyLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. When we see an average earnings outlook with market-like growth, we suspect the share price is at risk of declining, sending the high P/E lower. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

You need to take note of risks, for example - Ningbo Joy Intelligent Logistics TechnologyLtd has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.