There's Reason For Concern Over Suzhou Longway Eletronic Machinery Co., Ltd's (SZSE:301202) Massive 25% Price Jump

Suzhou Longway Eletronic Machinery Co., Ltd (SZSE:301202) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last month tops off a massive increase of 107% in the last year.

After such a large jump in price, Suzhou Longway Eletronic Machinery's price-to-earnings (or "P/E") ratio of 77.6x 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 36x and even P/E's below 20x are quite common. 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.

For example, consider that Suzhou Longway Eletronic Machinery's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, 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.

See our latest analysis for Suzhou Longway Eletronic Machinery

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

Is There Enough Growth For Suzhou Longway Eletronic Machinery?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Suzhou Longway Eletronic Machinery's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 13%. As a result, earnings from three years ago have also fallen 6.9% 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 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 alarming that Suzhou Longway Eletronic Machinery's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Suzhou Longway Eletronic Machinery's P/E

Shares in Suzhou Longway Eletronic Machinery have built up some good momentum lately, which has really inflated its P/E. 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 Suzhou Longway Eletronic Machinery 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.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Suzhou Longway Eletronic Machinery (of which 1 can't be ignored!) you should know about.

Of course, you might also be able to find a better stock than Suzhou Longway Eletronic Machinery. 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.