Xinjiang Daqo New Energy Co.,Ltd.'s (SHSE:688303) price-to-earnings (or "P/E") ratio of 10.9x might make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 29x and even P/E's above 53x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Recent times haven't been advantageous for Xinjiang Daqo New EnergyLtd 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. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

Is There Any Growth For Xinjiang Daqo New EnergyLtd?

In order to justify its P/E ratio, Xinjiang Daqo New EnergyLtd would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 71% decrease to the company's bottom line. However, a few very strong years before that means that it was still able to grow EPS by an impressive 290% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the seven analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 22% each year, which is noticeably more attractive.

With this information, we can see why Xinjiang Daqo New EnergyLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

As we suspected, our examination of Xinjiang Daqo New EnergyLtd's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Xinjiang Daqo New EnergyLtd that we have uncovered.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.