Those holding Ningbo Tuopu Group Co.,Ltd. (SHSE:601689) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 5.6% isn't as impressive.
Even after such a large jump in price, it's still not a stretch to say that Ningbo Tuopu GroupLtd's price-to-earnings (or "P/E") ratio of 31.1x right now seems quite "middle-of-the-road" compared to the market in China, where the median P/E ratio is around 32x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, Ningbo Tuopu GroupLtd has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
Does Growth Match The P/E?
The only time you'd be comfortable seeing a P/E like Ningbo Tuopu GroupLtd's is when the company's growth is tracking the market closely.
Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Pleasingly, EPS has also lifted 226% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.
Turning to the outlook, the next year should generate growth of 28% as estimated by the analysts watching the company. That's shaping up to be materially lower than the 40% growth forecast for the broader market.
In light of this, it's curious that Ningbo Tuopu GroupLtd's P/E sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
The Bottom Line On Ningbo Tuopu GroupLtd's P/E
Ningbo Tuopu GroupLtd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
Our examination of Ningbo Tuopu GroupLtd's analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the moderate P/E lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
You always need to take note of risks, for example - Ningbo Tuopu GroupLtd has 1 warning sign we think you should be aware of.
If you're unsure about the strength of Ningbo Tuopu GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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