Xuelong Group Co.,Ltd's (SHSE:603949) Shares Climb 25% But Its Business Is Yet to Catch Up

Xuelong Group Co.,Ltd (SHSE:603949) shares have continued their recent momentum with a 25% gain in the last month alone. But the last month did very little to improve the 51% share price decline over the last year.

After such a large jump in price, Xuelong GroupLtd may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 46.9x, since almost half of all companies in China have P/E ratios under 35x and even P/E's lower than 21x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

The recent earnings growth at Xuelong GroupLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/E is high because investors think this good earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Xuelong GroupLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Xuelong GroupLtd's earnings, revenue and cash flow.

How Is Xuelong GroupLtd's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Xuelong GroupLtd's to be considered reasonable.

Retrospectively, the last year delivered a decent 3.6% gain to the company's bottom line. Still, lamentably EPS has fallen 59% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that Xuelong GroupLtd is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Xuelong GroupLtd's P/E?

Xuelong GroupLtd's P/E is getting right up there since its shares have risen strongly. 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.

Our examination of Xuelong GroupLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very 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 Xuelong GroupLtd you should know about.

If you're unsure about the strength of Xuelong GroupLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.