Subdued Growth No Barrier To Ningbo Techmation Co.,Ltd. (SHSE:603015) With Shares Advancing 30%

Despite an already strong run, Ningbo Techmation Co.,Ltd. (SHSE:603015) shares have been powering on, with a gain of 30% in the last thirty days. The last month tops off a massive increase of 123% in the last year.

Since its price has surged higher, Ningbo TechmationLtd's price-to-earnings (or "P/E") ratio of 59.3x 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 34x and even P/E's below 20x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Ningbo TechmationLtd has been doing very well. 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

Check out our latest analysis for Ningbo TechmationLtd

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

Is There Enough Growth For Ningbo TechmationLtd?

The only time you'd be truly comfortable seeing a P/E as steep as Ningbo TechmationLtd's is when the company's growth is on track to outshine the market decidedly.

Taking a look back first, we see that the company grew earnings per share by an impressive 122% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 13% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

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

The Key Takeaway

Ningbo TechmationLtd's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ningbo TechmationLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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 3 warning signs for Ningbo TechmationLtd (1 makes us a bit uncomfortable!) that we have uncovered.

Of course, you might also be able to find a better stock than Ningbo TechmationLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.