Newcapec Electronics Co., Ltd. (SZSE:300248) Stock Rockets 36% As Investors Are Less Pessimistic Than Expected

Newcapec Electronics Co., Ltd. (SZSE:300248) shareholders have had their patience rewarded with a 36% share price jump in the last month. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.5% in the last twelve months.

Since its price has surged higher, Newcapec Electronics may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 40.7x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x 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 as high as it is.

As an illustration, earnings have deteriorated at Newcapec Electronics over the last year, which is not ideal at all. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Newcapec Electronics

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 Newcapec Electronics' earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

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

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 14%. As a result, earnings from three years ago have also fallen 33% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Newcapec Electronics is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Newcapec Electronics' P/E

Newcapec Electronics' P/E is getting right up there since its shares have risen strongly. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Newcapec Electronics revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. 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.

Having said that, be aware Newcapec Electronics is showing 3 warning signs in our investment analysis, and 1 of those is significant.

Of course, you might also be able to find a better stock than Newcapec Electronics. 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.