New East New Materials Co., Ltd's (SHSE:603110) Shares Climb 27% But Its Business Is Yet to Catch Up

Simply Wall St · 09/28 01:00

New East New Materials Co., Ltd (SHSE:603110) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. But the last month did very little to improve the 58% share price decline over the last year.

Since its price has surged higher, New East New Materials may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 45.6x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 17x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

Recent times have been quite advantageous for New East New Materials as its earnings have been rising very briskly. The P/E is probably high because investors think this strong earnings growth will be enough to outperform the broader market in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for New East New Materials

pe-multiple-vs-industry
SHSE:603110 Price to Earnings Ratio vs Industry September 28th 2024
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on New East New Materials will help you shine a light on its historical performance.

Is There Enough Growth For New East New Materials?

There's an inherent assumption that a company should far outperform the market for P/E ratios like New East New Materials' to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 186% last year. Still, incredibly EPS has fallen 33% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 36% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that New East New Materials is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

The strong share price surge has got New East New Materials' P/E rushing to great heights as well. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that New East New Materials currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for New East New Materials that you should be aware of.

If you're unsure about the strength of New East New Materials' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.