Wanxiang Qianchao Co.,Ltd. (SZSE:000559) Held Back By Insufficient Growth Even After Shares Climb 29%

Wanxiang Qianchao Co.,Ltd. (SZSE:000559) shares have continued their recent momentum with a 29% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 26% in the last year.

In spite of the firm bounce in price, Wanxiang QianchaoLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 24.1x, since almost half of all companies in China have P/E ratios greater than 36x and even P/E's higher than 71x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Wanxiang QianchaoLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Wanxiang QianchaoLtd

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wanxiang QianchaoLtd will help you shine a light on its historical performance.

How Is Wanxiang QianchaoLtd's Growth Trending?

There's an inherent assumption that a company should underperform the market for P/E ratios like Wanxiang QianchaoLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 19% last year. Pleasingly, EPS has also lifted 42% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing earnings over that time.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why Wanxiang QianchaoLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

The latest share price surge wasn't enough to lift Wanxiang QianchaoLtd's P/E close to the market median. 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.

We've established that Wanxiang QianchaoLtd maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about this 1 warning sign we've spotted with Wanxiang QianchaoLtd.

Of course, you might also be able to find a better stock than Wanxiang QianchaoLtd. 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.