Subdued Growth No Barrier To Wuxi NCE Power Co.,Ltd. (SHSE:605111) With Shares Advancing 26%

Wuxi NCE Power Co.,Ltd. (SHSE:605111) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, despite the strong performance over the last month, the full year gain of 2.5% isn't as attractive.

After such a large jump in price, Wuxi NCE PowerLtd's price-to-earnings (or "P/E") ratio of 37.3x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 29x and even P/E's below 17x are quite common. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

Wuxi NCE PowerLtd could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. 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.

Check out our latest analysis for Wuxi NCE PowerLtd

Keen to find out how analysts think Wuxi NCE PowerLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Does Growth Match The High P/E?

Wuxi NCE PowerLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 7.3%. Even so, admirably EPS has lifted 54% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the seven analysts covering the company suggest earnings should grow by 16% per year over the next three years. That's shaping up to be materially lower than the 25% per annum growth forecast for the broader market.

In light of this, it's alarming that Wuxi NCE PowerLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

Wuxi NCE PowerLtd shares have received a push in the right direction, but its P/E is elevated too. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Wuxi NCE PowerLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its high P/E anywhere near as much as we would have predicted. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Wuxi NCE PowerLtd with six simple checks on some of these key factors.

If these risks are making you reconsider your opinion on Wuxi NCE PowerLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

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