With a median price-to-earnings (or "P/E") ratio of close to 35x in China, you could be forgiven for feeling indifferent about Ningxia Orient Tantalum Industry Co., Ltd.'s (SZSE:000962) P/E ratio of 35.2x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Recent times have been pleasing for Ningxia Orient Tantalum Industry as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to deteriorate like the rest, which has kept the P/E from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Check out our latest analysis for Ningxia Orient Tantalum Industry
Does Growth Match The P/E?
Ningxia Orient Tantalum Industry's P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Retrospectively, the last year delivered an exceptional 50% gain to the company's bottom line. The strong recent performance means it was also able to grow EPS by 237% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 16% over the next year. That's shaping up to be materially lower than the 43% growth forecast for the broader market.
With this information, we find it interesting that Ningxia Orient Tantalum Industry is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.
What We Can Learn From Ningxia Orient Tantalum Industry's 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.
We've established that Ningxia Orient Tantalum Industry currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.
You need to take note of risks, for example - Ningxia Orient Tantalum Industry has 2 warning signs (and 1 which is significant) we think you should know about.
You might be able to find a better investment than Ningxia Orient Tantalum Industry. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.