Yunnan Nantian Electronics Information Co.,Ltd. (SZSE:000948) Stock Rockets 35% As Investors Are Less Pessimistic Than Expected

Yunnan Nantian Electronics Information Co.,Ltd. (SZSE:000948) shares have had a really impressive month, gaining 35% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.2% in the last twelve months.

After such a large jump in price, Yunnan Nantian Electronics InformationLtd's price-to-earnings (or "P/E") ratio of 40.2x 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 26x and even P/E's below 16x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

The earnings growth achieved at Yunnan Nantian Electronics InformationLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for Yunnan Nantian Electronics InformationLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Yunnan Nantian Electronics InformationLtd's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Yunnan Nantian Electronics InformationLtd's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 13%. The solid recent performance means it was also able to grow EPS by 27% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 36% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Yunnan Nantian Electronics InformationLtd is trading at a P/E higher than the market. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Yunnan Nantian Electronics InformationLtd's P/E

Shares in Yunnan Nantian Electronics InformationLtd have built up some good momentum lately, which has really inflated its P/E. 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 Yunnan Nantian Electronics InformationLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near 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 high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Yunnan Nantian Electronics InformationLtd that you should be aware of.

If you're unsure about the strength of Yunnan Nantian Electronics InformationLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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