Shenzhen Xinyuren Technology Co., Ltd.'s (SHSE:688573) 28% Jump Shows Its Popularity With Investors

Shenzhen Xinyuren Technology Co., Ltd. (SHSE:688573) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Shenzhen Xinyuren Technology's P/E ratio of 32.2x, since the median price-to-earnings (or "P/E") ratio in China is also close to 30x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

As an illustration, earnings have deteriorated at Shenzhen Xinyuren Technology over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing earnings performance behind them over the coming period, which has kept the P/E from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

View our latest analysis for Shenzhen Xinyuren Technology

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 Shenzhen Xinyuren Technology's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The P/E?

The only time you'd be comfortable seeing a P/E like Shenzhen Xinyuren Technology's is when the company's growth is tracking the market closely.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Even so, admirably EPS has lifted 201% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

It's interesting to note that the rest of the market is similarly expected to grow by 41% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this information, we can see why Shenzhen Xinyuren Technology is trading at a fairly similar P/E to the market. Apparently shareholders are comfortable to simply hold on assuming the company will continue keeping a low profile.

The Key Takeaway

Shenzhen Xinyuren Technology's stock has a lot of momentum behind it lately, which has brought its P/E level with the market. 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 Shenzhen Xinyuren Technology revealed its three-year earnings trends are contributing to its P/E, given they look similar to current market expectations. Right now shareholders are comfortable with the P/E as they are quite confident future earnings won't throw up any surprises. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

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

You might be able to find a better investment than Shenzhen Xinyuren Technology. 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.