What Zhejiang XCC Group Co.,Ltd's (SHSE:603667) 29% Share Price Gain Is Not Telling You

Despite an already strong run, Zhejiang XCC Group Co.,Ltd (SHSE:603667) shares have been powering on, with a gain of 29% in the last thirty days. Unfortunately, despite the strong performance over the last month, the full year gain of 5.3% isn't as attractive.

Since its price has surged higher, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Zhejiang XCC GroupLtd as a stock to avoid entirely with its 71.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

Recent times haven't been advantageous for Zhejiang XCC GroupLtd as its earnings have been falling quicker than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

See our latest analysis for Zhejiang XCC GroupLtd

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Does Growth Match The High P/E?

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

Retrospectively, the last year delivered a frustrating 21% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 32% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Turning to the outlook, the next year should generate growth of 33% as estimated by the lone analyst watching the company. That's shaping up to be materially lower than the 39% growth forecast for the broader market.

In light of this, it's alarming that Zhejiang XCC GroupLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Bottom Line On Zhejiang XCC GroupLtd's P/E

Shares in Zhejiang XCC GroupLtd have built up some good momentum lately, which has really inflated its P/E. 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 Zhejiang XCC GroupLtd currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. When we see a weak earnings outlook with slower than market growth, we suspect the share price is at risk of declining, sending the high P/E lower. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about this 1 warning sign we've spotted with Zhejiang XCC GroupLtd.

If these risks are making you reconsider your opinion on Zhejiang XCC GroupLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.