Changzhou Langbo Sealing Technologies Co.,Ltd.'s (SHSE:603655) 39% Share Price Surge Not Quite Adding Up

Simply Wall St · 10/17 22:37

Changzhou Langbo Sealing Technologies Co.,Ltd. (SHSE:603655) shares have had a really impressive month, gaining 39% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

After such a large jump in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 31x, you may consider Changzhou Langbo Sealing TechnologiesLtd as a stock to avoid entirely with its 74.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With earnings growth that's exceedingly strong of late, Changzhou Langbo Sealing TechnologiesLtd has been doing very well. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Changzhou Langbo Sealing TechnologiesLtd

pe-multiple-vs-industry
SHSE:603655 Price to Earnings Ratio vs Industry October 17th 2024
Although there are no analyst estimates available for Changzhou Langbo Sealing TechnologiesLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Growth For Changzhou Langbo Sealing TechnologiesLtd?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Changzhou Langbo Sealing TechnologiesLtd's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 6.2% drop in EPS in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 37% shows it's an unpleasant look.

In light of this, it's alarming that Changzhou Langbo Sealing TechnologiesLtd's P/E sits above the majority of other companies. 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Changzhou Langbo Sealing TechnologiesLtd's P/E is flying high just like its stock has during the last month. 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.

We've established that Changzhou Langbo Sealing TechnologiesLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. 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 1 warning sign for Changzhou Langbo Sealing TechnologiesLtd that you should be aware of.

If these risks are making you reconsider your opinion on Changzhou Langbo Sealing TechnologiesLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.