Ningbo Water Meter (Group) Co.,Ltd. (SHSE:603700) Shares Fly 28% But Investors Aren't Buying For Growth

Ningbo Water Meter (Group) Co.,Ltd. (SHSE:603700) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 38x, you may still consider Ningbo Water Meter (Group)Ltd as an attractive investment with its 30.3x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at Ningbo Water Meter (Group)Ltd over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Ningbo Water Meter (Group)Ltd

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 Ningbo Water Meter (Group)Ltd's earnings, revenue and cash flow.

Is There Any Growth For Ningbo Water Meter (Group)Ltd?

The only time you'd be truly comfortable seeing a P/E as low as Ningbo Water Meter (Group)Ltd's is when the company's growth is on track to lag the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 40%. As a result, earnings from three years ago have also fallen 66% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 37% 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 understandable that Ningbo Water Meter (Group)Ltd's P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Ningbo Water Meter (Group)Ltd's P/E?

The latest share price surge wasn't enough to lift Ningbo Water Meter (Group)Ltd's P/E close to the market median. 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.

As we suspected, our examination of Ningbo Water Meter (Group)Ltd revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - Ningbo Water Meter (Group)Ltd has 3 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.