Investors Still Aren't Entirely Convinced By Northking Information Technology Co., Ltd.'s (SZSE:002987) Earnings Despite 34% Price Jump

Despite an already strong run, Northking Information Technology Co., Ltd. (SZSE:002987) shares have been powering on, with a gain of 34% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.2% isn't as attractive.

In spite of the firm bounce in price, Northking Information Technology may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 27.6x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

There hasn't been much to differentiate Northking Information Technology's and the market's retreating earnings lately. It might be that many expect the company's earnings performance to degrade further, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. At the very least, you'd be hoping that earnings don't fall off a cliff if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Northking Information Technology

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Northking Information Technology would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's bottom line. This has erased any of its gains during the last three years, with practically no change in EPS being achieved in total. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 22% per annum over the next three years. That's shaping up to be materially higher than the 19% per annum growth forecast for the broader market.

With this information, we find it odd that Northking Information Technology is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Northking Information Technology's P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Northking Information Technology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Northking Information Technology is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Northking Information 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.