With a price-to-earnings (or "P/E") ratio of 4.8x Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 35x and even P/E's higher than 64x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.
Yongxing Special Materials TechnologyLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
See our latest analysis for Yongxing Special Materials TechnologyLtd
How Is Yongxing Special Materials TechnologyLtd's Growth Trending?
There's an inherent assumption that a company should far underperform the market for P/E ratios like Yongxing Special Materials TechnologyLtd's to be considered reasonable.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 8.3% last year. The latest three year period has also seen an excellent 1,768% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing earnings over that time.
Looking ahead now, EPS is anticipated to slump, contracting by 37% during the coming year according to the seven analysts following the company. Meanwhile, the broader market is forecast to expand by 44%, which paints a poor picture.
With this information, we are not surprised that Yongxing Special Materials TechnologyLtd is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.
The Final Word
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 Yongxing Special Materials TechnologyLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
And what about other risks? Every company has them, and we've spotted 3 warning signs for Yongxing Special Materials TechnologyLtd (of which 1 shouldn't be ignored!) you should know about.
Of course, you might also be able to find a better stock than Yongxing Special Materials TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.