Nextool Technology Co., Ltd.'s (SHSE:688419) Shares Climb 37% But Its Business Is Yet to Catch Up

Nextool Technology Co., Ltd. (SHSE:688419) shareholders have had their patience rewarded with a 37% share price jump in the last month. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.1% over the last year.

Although its price has surged higher, it's still not a stretch to say that Nextool Technology's price-to-earnings (or "P/E") ratio of 39.4x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 36x. 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.

Recent times have been quite advantageous for Nextool Technology as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

View our latest analysis for Nextool Technology

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Nextool Technology will help you shine a light on its historical performance.

Is There Some Growth For Nextool Technology?

In order to justify its P/E ratio, Nextool Technology would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 63% last year. As a result, it also grew EPS by 11% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's curious that Nextool Technology's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent earnings trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Nextool Technology's P/E is also back up to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Nextool Technology revealed its three-year earnings trends aren't impacting its P/E as much as we would have predicted, given they look worse than current market expectations. When we see weak earnings with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Nextool Technology that you should be aware of.

If these risks are making you reconsider your opinion on Nextool Technology, 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.