Optimistic Investors Push Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) Shares Up 30% But Growth Is Lacking

Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) shares have continued their recent momentum with a 30% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 85%.

After such a large jump in price, Shanghai Jin Jiang Online Network Service may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 50.9x, since almost half of all companies in China have P/E ratios under 37x and even P/E's lower than 21x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

With earnings growth that's exceedingly strong of late, Shanghai Jin Jiang Online Network Service has been doing very well. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shanghai Jin Jiang Online Network Service

Although there are no analyst estimates available for Shanghai Jin Jiang Online Network Service, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Shanghai Jin Jiang Online Network Service's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Shanghai Jin Jiang Online Network Service's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 61% last year. However, this wasn't enough as the latest three year period has seen a very unpleasant 24% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's alarming that Shanghai Jin Jiang Online Network Service's P/E sits above the majority of other companies. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

Shanghai Jin Jiang Online Network Service's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Shanghai Jin Jiang Online Network Service currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Shanghai Jin Jiang Online Network Service (1 is significant!) that you need to take into consideration.

You might be able to find a better investment than Shanghai Jin Jiang Online Network Service. 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.