Xinyi Electric Storage Holdings Limited (HKG:8328) shares have had a horrible month, losing 26% after a relatively good period beforehand. For any long-term shareholders, the last month ends a year to forget by locking in a 57% share price decline.
Even after such a large drop in price, Xinyi Electric Storage Holdings' price-to-earnings (or "P/E") ratio of 13.5x might still make it look like a sell right now compared to the market in Hong Kong, where around half of the companies have P/E ratios below 9x and even P/E's below 5x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.
Recent times have been quite advantageous for Xinyi Electric Storage Holdings as its earnings have been rising very briskly. It seems that many are expecting the strong earnings performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
How Is Xinyi Electric Storage Holdings' Growth Trending?
There's an inherent assumption that a company should outperform the market for P/E ratios like Xinyi Electric Storage Holdings' to be considered reasonable.
If we review the last year of earnings growth, the company posted a terrific increase of 72%. The latest three year period has also seen an excellent 244% overall rise in EPS, aided 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.
This is in contrast to the rest of the market, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.
With this information, we can see why Xinyi Electric Storage Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
The Final Word
Xinyi Electric Storage Holdings' P/E hasn't come down all the way after its stock plunged. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Xinyi Electric Storage Holdings revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Xinyi Electric Storage Holdings with six simple checks on some of these key factors.
Of course, you might also be able to find a better stock than Xinyi Electric Storage Holdings. 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.