Tianjin Ruixin Technology Co.,Ltd (SZSE:300828) shareholders are no doubt pleased to see that the share price has bounced 43% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.
Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Tianjin Ruixin TechnologyLtd as an attractive investment with its 26.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
For instance, Tianjin Ruixin TechnologyLtd's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. 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.
Does Growth Match The Low P/E?
The only time you'd be truly comfortable seeing a P/E as low as Tianjin Ruixin TechnologyLtd's is when the company's growth is on track to lag the market.
If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 20%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 5.2% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.
This is in contrast to the rest of the market, which is expected to grow by 41% over the next year, materially higher than the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Tianjin Ruixin TechnologyLtd's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.
The Final Word
The latest share price surge wasn't enough to lift Tianjin Ruixin TechnologyLtd's P/E close to the market median. 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 Tianjin Ruixin TechnologyLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
You need to take note of risks, for example - Tianjin Ruixin TechnologyLtd has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
If these risks are making you reconsider your opinion on Tianjin Ruixin TechnologyLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.
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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.