The Shenzhen XFH Technology Co.,Ltd (SZSE:300890) share price has fared very poorly over the last month, falling by a substantial 27%. Longer-term shareholders would now have taken a real hit with the stock declining 3.1% in the last year.

Even after such a large drop in price, Shenzhen XFH TechnologyLtd may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 40.1x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 19x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's lofty.

Recent times have been quite advantageous for Shenzhen XFH TechnologyLtd 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Shenzhen XFH TechnologyLtd

Is There Enough Growth For Shenzhen XFH TechnologyLtd?

In order to justify its P/E ratio, Shenzhen XFH TechnologyLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered an exceptional 78% gain to the company's bottom line. EPS has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 34% shows it's noticeably less attractive on an annualised basis.

With this information, we find it concerning that Shenzhen XFH TechnologyLtd 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Despite the recent share price weakness, Shenzhen XFH TechnologyLtd's P/E remains higher than most other companies. 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 Shenzhen XFH TechnologyLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely 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 and we've discovered 2 warning signs for Shenzhen XFH TechnologyLtd (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you're unsure about the strength of Shenzhen XFH TechnologyLtd'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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