The Xingfa Aluminium Holdings Limited (HKG:98) share price has done very well over the last month, posting an excellent gain of 29%. Notwithstanding the latest gain, the annual share price return of 8.7% isn't as impressive.
In spite of the firm bounce in price, there still wouldn't be many who think Xingfa Aluminium Holdings' price-to-earnings (or "P/E") ratio of 7.5x is worth a mention when the median P/E in Hong Kong is similar at about 9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
For instance, Xingfa Aluminium Holdings' receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.
Is There Some Growth For Xingfa Aluminium Holdings?
Xingfa Aluminium Holdings' P/E ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the market.
Retrospectively, the last year delivered a frustrating 49% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 34% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.
In contrast to the company, the rest of the market is expected to grow by 23% over the next year, which really puts the company's recent medium-term earnings decline into perspective.
In light of this, it's somewhat alarming that Xingfa Aluminium Holdings' P/E sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh on the share price eventually.
The Key Takeaway
Xingfa Aluminium Holdings appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 Xingfa Aluminium Holdings currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Xingfa Aluminium Holdings you should know about.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
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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.