With a price-to-earnings (or "P/E") ratio of 14.2x Xingye Leather Technology Co., Ltd. (SZSE:002674) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 27x and even P/E's higher than 48x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Xingye Leather Technology as its earnings have risen in spite of the market's earnings going into reverse. 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 you 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 Xingye Leather Technology?
The only time you'd be truly comfortable seeing a P/E as low as Xingye Leather Technology's is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 42% last year. Pleasingly, EPS has also lifted 183% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 49% over the next year. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.
With this information, we find it odd that Xingye Leather Technology 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 Key Takeaway
Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of Xingye Leather Technology'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.
It is also worth noting that we have found 2 warning signs for Xingye Leather Technology (1 is concerning!) that you need to take into consideration.
You might be able to find a better investment than Xingye Leather Technology. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.