Stock Analysis

Wuxi Lihu Corporation Limited.'s (SZSE:300694) 26% Share Price Surge Not Quite Adding Up

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Wuxi Lihu Corporation Limited. (SZSE:300694) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, despite the strong performance over the last month, the full year gain of 2.6% isn't as attractive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Wuxi Lihu's P/E ratio of 32.8x, since the median price-to-earnings (or "P/E") ratio in China is also close to 31x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Recent times have been quite advantageous for Wuxi Lihu as its earnings have been rising very briskly. The P/E is probably moderate because investors think this strong earnings growth might not be enough to outperform 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 not quite in favour.

Check out our latest analysis for Wuxi Lihu

SZSE:300694 Price to Earnings Ratio vs Industry March 18th 2024
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wuxi Lihu will help you shine a light on its historical performance.

How Is Wuxi Lihu's Growth Trending?

In order to justify its P/E ratio, Wuxi Lihu would need to produce growth that's similar to the market.

Retrospectively, the last year delivered an exceptional 491% gain to the company's bottom line. Although, its longer-term performance hasn't been as strong with three-year EPS growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 40% shows it's noticeably less attractive on an annualised basis.

In light of this, it's curious that Wuxi Lihu's P/E sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now Wuxi Lihu's P/E is also back up 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 Wuxi Lihu currently trades on a higher than expected P/E since its recent three-year growth is lower than the wider market forecast. Right now we are uncomfortable with the P/E as this earnings performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Wuxi Lihu that you need to be mindful of.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Wuxi Lihu is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.