Shanghai Jin Jiang Online Network Service Co., Ltd.'s (SHSE:600650) 36% Price Boost Is Out Of Tune With Earnings

Shanghai Jin Jiang Online Network Service Co., Ltd. (SHSE:600650) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 56% in the last year.

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 44x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 19x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Shanghai Jin Jiang Online Network Service certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Shanghai Jin Jiang Online Network Service

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shanghai Jin Jiang Online Network Service will help you shine a light on its historical performance.

Is There Enough Growth For Shanghai Jin Jiang Online Network Service?

The only time you'd be truly comfortable seeing a P/E as high as Shanghai Jin Jiang Online Network Service's is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 86%. Still, incredibly EPS has fallen 21% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Shanghai Jin Jiang Online Network Service is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Shanghai Jin Jiang Online Network Service's P/E?

Shanghai Jin Jiang Online Network Service's P/E is getting right up there since its shares have risen strongly. 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 Shanghai Jin Jiang Online Network Service revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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.

Before you take the next step, you should know about the 4 warning signs for Shanghai Jin Jiang Online Network Service (2 are significant!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.