The Xinyaqiang Silicon Chemistry Co.,Ltd (SHSE:603155) share price has fared very poorly over the last month, falling by a substantial 25%. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 37% share price drop.
Even after such a large drop in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 30x, you may still consider Xinyaqiang Silicon ChemistryLtd as an attractive investment with its 25.7x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
Recent times haven't been advantageous for Xinyaqiang Silicon ChemistryLtd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Check out our latest analysis for Xinyaqiang Silicon ChemistryLtd
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Xinyaqiang Silicon ChemistryLtd's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 55% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 26% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.
Shifting to the future, estimates from the covering the company suggest earnings should grow by 310% over the next year. That's shaping up to be materially higher than the 42% growth forecast for the broader market.
With this information, we find it odd that Xinyaqiang Silicon ChemistryLtd 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
Xinyaqiang Silicon ChemistryLtd's P/E has taken a tumble along with its share price. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
We've established that Xinyaqiang Silicon ChemistryLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. 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. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Xinyaqiang Silicon ChemistryLtd that you should be aware of.
You might be able to find a better investment than Xinyaqiang Silicon ChemistryLtd. 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.