XTC New Energy Materials(Xiamen) Co.,Ltd. (SHSE:688778) Soars 51% But It's A Story Of Risk Vs Reward

XTC New Energy Materials(Xiamen) Co.,Ltd. (SHSE:688778) shareholders would be excited to see that the share price has had a great month, posting a 51% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.7% over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about XTC New Energy Materials(Xiamen)Ltd's P/E ratio of 33.6x, since the median price-to-earnings (or "P/E") ratio in China is also close to 34x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

XTC New Energy Materials(Xiamen)Ltd has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to revert back to market averages soon, which has kept the P/E from falling. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders may be a little nervous about the viability of the share price.

See our latest analysis for XTC New Energy Materials(Xiamen)Ltd

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

The only time you'd be comfortable seeing a P/E like XTC New Energy Materials(Xiamen)Ltd's is when the company's growth is tracking the market closely.

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 40%. The last three years don't look nice either as the company has shrunk EPS by 21% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 26% per annum as estimated by the four analysts watching the company. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

In light of this, it's curious that XTC New Energy Materials(Xiamen)Ltd's P/E sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Final Word

XTC New Energy Materials(Xiamen)Ltd appears to be back in favour with a solid price jump getting its P/E back in line with most other companies. 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 XTC New Energy Materials(Xiamen)Ltd currently trades on a lower than expected P/E since its forecast growth is higher than the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for XTC New Energy Materials(Xiamen)Ltd that you should be aware of.

Of course, you might also be able to find a better stock than XTC New Energy Materials(Xiamen)Ltd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.