Further Upside For XCMG Construction Machinery Co., Ltd. (SZSE:000425) Shares Could Introduce Price Risks After 28% Bounce

XCMG Construction Machinery Co., Ltd. (SZSE:000425) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 48%.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may still consider XCMG Construction Machinery as a highly attractive investment with its 19.3x 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 limited.

Recent times have been pleasing for XCMG Construction Machinery as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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 out of favour.

Check out our latest analysis for XCMG Construction Machinery

If you'd like to see what analysts are forecasting going forward, you should check out our free report on XCMG Construction Machinery.

Is There Any Growth For XCMG Construction Machinery?

XCMG Construction Machinery's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 32% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 52% overall. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 33% over the next year. That's shaping up to be similar to the 37% growth forecast for the broader market.

In light of this, it's peculiar that XCMG Construction Machinery's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

The Bottom Line On XCMG Construction Machinery's P/E

Shares in XCMG Construction Machinery are going to need a lot more upward momentum to get the company's P/E out of its slump. 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.

Our examination of XCMG Construction Machinery's analyst forecasts revealed that its market-matching earnings outlook isn't contributing to its P/E as much as we would have predicted. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.

Before you settle on your opinion, we've discovered 3 warning signs for XCMG Construction Machinery (1 is a bit concerning!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.