Tongling Nonferrous Metals Group Co.,Ltd.'s (SZSE:000630) price-to-earnings (or "P/E") ratio of 19.9x might make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
While the market has experienced earnings growth lately, Tongling Nonferrous Metals GroupLtd's earnings have gone into reverse gear, which is not great. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Is There Any Growth For Tongling Nonferrous Metals GroupLtd?
The only time you'd be truly comfortable seeing a P/E as low as Tongling Nonferrous Metals GroupLtd's is when the company's growth is on track to lag the market.
Retrospectively, the last year delivered a frustrating 17% decrease to the company's bottom line. Even so, admirably EPS has lifted 133% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.
Turning to the outlook, the next year should generate growth of 40% as estimated by the two analysts watching the company. With the market only predicted to deliver 35%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Tongling Nonferrous Metals GroupLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.
The Bottom Line On Tongling Nonferrous Metals GroupLtd's P/E
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Tongling Nonferrous Metals GroupLtd's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Tongling Nonferrous Metals GroupLtd you should know about.
If these risks are making you reconsider your opinion on Tongling Nonferrous Metals GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.