What Beijing Jiaxun Feihong Electrical Co., Ltd.'s (SZSE:300213) 46% Share Price Gain Is Not Telling You

Despite an already strong run, Beijing Jiaxun Feihong Electrical Co., Ltd. (SZSE:300213) shares have been powering on, with a gain of 46% in the last thirty days. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

After such a large jump in price, Beijing Jiaxun Feihong Electrical may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 74.8x, since almost half of all companies in China have P/E ratios under 33x and even P/E's lower than 20x are not unusual. 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.

We'd have to say that with no tangible growth over the last year, Beijing Jiaxun Feihong Electrical's earnings have been unimpressive. One possibility is that the P/E is high because investors think the benign earnings growth will improve 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 Beijing Jiaxun Feihong Electrical

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 Beijing Jiaxun Feihong Electrical's earnings, revenue and cash flow.

Is There Enough Growth For Beijing Jiaxun Feihong Electrical?

Beijing Jiaxun Feihong Electrical's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, the company posted a result that saw barely any deviation from a year ago. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with earnings down 33% overall from three years ago. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Beijing Jiaxun Feihong Electrical'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 Bottom Line On Beijing Jiaxun Feihong Electrical's P/E

The strong share price surge has got Beijing Jiaxun Feihong Electrical's P/E rushing to great heights as well. 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.

We've established that Beijing Jiaxun Feihong Electrical currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. 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.

It is also worth noting that we have found 2 warning signs for Beijing Jiaxun Feihong Electrical (1 is potentially serious!) that you need to take into consideration.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.