Anhui Zhongyuan New Materials Co., Ltd. (SHSE:603527) Stock Catapults 35% Though Its Price And Business Still Lag The Market

Anhui Zhongyuan New Materials Co., Ltd. (SHSE:603527) shares have continued their recent momentum with a 35% 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 2.8% over the last year.

Even after such a large jump in price, Anhui Zhongyuan New Materials may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 30.3x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

For example, consider that Anhui Zhongyuan New Materials' financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Anhui Zhongyuan New Materials

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

Is There Any Growth For Anhui Zhongyuan New Materials?

Anhui Zhongyuan New Materials' P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. The last three years don't look nice either as the company has shrunk EPS by 25% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's an unpleasant look.

In light of this, it's understandable that Anhui Zhongyuan New Materials' P/E would sit below the majority of other companies. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There's potential for the P/E to fall to even lower levels if the company doesn't improve its profitability.

What We Can Learn From Anhui Zhongyuan New Materials' P/E?

Anhui Zhongyuan New Materials' stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Anhui Zhongyuan New Materials revealed its shrinking earnings over the medium-term are contributing to its low P/E, given the market is set to grow. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for Anhui Zhongyuan New Materials (2 are potentially serious!) that you need to take into consideration.

You might be able to find a better investment than Anhui Zhongyuan New Materials. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.