Xuchang Yuandong Drive Shaft Co.Ltd (SZSE:002406) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Xuchang Yuandong Drive Shaft Co.Ltd (SZSE:002406) shares have continued their recent momentum with a 28% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.7% over the last year.

After such a large jump in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Xuchang Yuandong Drive ShaftLtd as a stock to potentially avoid with its 42.5x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

The earnings growth achieved at Xuchang Yuandong Drive ShaftLtd over the last year would be more than acceptable for most companies. One possibility is that the P/E is high because investors think this respectable 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.

View our latest analysis for Xuchang Yuandong Drive ShaftLtd

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 Xuchang Yuandong Drive ShaftLtd's earnings, revenue and cash flow.

Is There Enough Growth For Xuchang Yuandong Drive ShaftLtd?

Xuchang Yuandong Drive ShaftLtd's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a decent 12% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen an unpleasant 63% overall drop in EPS. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Xuchang Yuandong Drive ShaftLtd's P/E sits above the majority of other companies. 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.

The Bottom Line On Xuchang Yuandong Drive ShaftLtd's P/E

Xuchang Yuandong Drive ShaftLtd shares have received a push in the right direction, but its P/E is elevated too. 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 Xuchang Yuandong Drive ShaftLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 3 warning signs for Xuchang Yuandong Drive ShaftLtd (1 shouldn't be ignored!) that you need to take into consideration.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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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.