Xiamen Solex High-tech Industries Co., Ltd. (SHSE:603992) shares have had a horrible month, losing 26% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 16% share price drop.
In spite of the heavy fall in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 27x, you may still consider Xiamen Solex High-tech Industries as an attractive investment with its 16.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With its earnings growth in positive territory compared to the declining earnings of most other companies, Xiamen Solex High-tech Industries has been doing quite well of late. 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.
How Is Xiamen Solex High-tech Industries' Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Xiamen Solex High-tech Industries' is when the company's growth is on track to lag the market.
Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.9% last year. The latest three year period has also seen a 27% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 26% over the next year. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Xiamen Solex High-tech Industries is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Xiamen Solex High-tech Industries' P/E has taken a tumble along with its share price. 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.
We've established that Xiamen Solex High-tech Industries maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Xiamen Solex High-tech Industries that you should be aware of.
Of course, you might also be able to find a better stock than Xiamen Solex High-tech Industries. 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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