Subdued Growth No Barrier To Chengdu Galaxy Magnets Co.,Ltd. (SZSE:300127) With Shares Advancing 66%

Chengdu Galaxy Magnets Co.,Ltd. (SZSE:300127) shares have continued their recent momentum with a 66% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 78%.

Following the firm bounce in price, Chengdu Galaxy MagnetsLtd's price-to-earnings (or "P/E") ratio of 78.7x 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 35x 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.

Chengdu Galaxy MagnetsLtd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for Chengdu Galaxy MagnetsLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Chengdu Galaxy MagnetsLtd.

Is There Enough Growth For Chengdu Galaxy MagnetsLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Chengdu Galaxy MagnetsLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 26%. This means it has also seen a slide in earnings over the longer-term as EPS is down 31% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 40% over the next year. With the market predicted to deliver 39% growth , the company is positioned for a comparable earnings result.

In light of this, it's curious that Chengdu Galaxy MagnetsLtd's P/E sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of earnings growth is likely to weigh down the share price eventually.

The Key Takeaway

Chengdu Galaxy MagnetsLtd's P/E is flying high just like its stock has during the last month. 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.

We've established that Chengdu Galaxy MagnetsLtd currently trades on a higher than expected P/E since its forecast growth is only in line with the wider market. Right now we are uncomfortable with the relatively high share price as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Chengdu Galaxy MagnetsLtd (1 is a bit concerning!) that you should be aware of before investing here.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.