Those holding Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) shares would be relieved that the share price has rebounded 39% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 50% over that time.
After such a large jump in price, Chengdu ALD Aviation Manufacturing may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 37.5x, 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. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.
Chengdu ALD Aviation Manufacturing has been struggling lately as its earnings have declined faster than most other companies. One possibility is that the P/E is high because investors think the company will turn things around completely and accelerate past most others in the market. If not, then existing shareholders may be very nervous about the viability of the share price.
Does Growth Match The High P/E?
In order to justify its P/E ratio, Chengdu ALD Aviation Manufacturing would need to produce impressive growth in excess of the market.
Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 61%. The last three years don't look nice either as the company has shrunk EPS by 4.4% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the only analyst covering the company suggest earnings should grow by 446% over the next year. That's shaping up to be materially higher than the 41% growth forecast for the broader market.
In light of this, it's understandable that Chengdu ALD Aviation Manufacturing's P/E sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Chengdu ALD Aviation Manufacturing's P/E is getting right up there since its shares have risen strongly. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.
We've established that Chengdu ALD Aviation Manufacturing maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Before you take the next step, you should know about the 2 warning signs for Chengdu ALD Aviation Manufacturing that we have uncovered.
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).
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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.