What Xiangtan Yongda Machinery Manufacturing Co., Ltd.'s (SZSE:001239) 27% Share Price Gain Is Not Telling You

Xiangtan Yongda Machinery Manufacturing Co., Ltd. (SZSE:001239) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. 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.

Following the firm bounce in price, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 39x, you may consider Xiangtan Yongda Machinery Manufacturing as a stock to potentially avoid with its 57.9x P/E ratio. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

For example, consider that Xiangtan Yongda Machinery Manufacturing's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Xiangtan Yongda Machinery Manufacturing

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 Xiangtan Yongda Machinery Manufacturing's earnings, revenue and cash flow.

Is There Enough Growth For Xiangtan Yongda Machinery Manufacturing?

Xiangtan Yongda Machinery Manufacturing's P/E ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the market.

Retrospectively, the last year delivered a frustrating 35% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 37% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

In contrast to the company, the rest of the market is expected to grow by 37% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Xiangtan Yongda Machinery Manufacturing's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Final Word

The large bounce in Xiangtan Yongda Machinery Manufacturing's shares has lifted the company's P/E to a fairly high level. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that Xiangtan Yongda Machinery Manufacturing currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Xiangtan Yongda Machinery Manufacturing that you should be aware of.

If these risks are making you reconsider your opinion on Xiangtan Yongda Machinery Manufacturing, 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.