Zhejiang XiaSha Precision Manufacturing Co., Ltd.'s (SZSE:001306) Shares Climb 32% But Its Business Is Yet to Catch Up

Zhejiang XiaSha Precision Manufacturing Co., Ltd. (SZSE:001306) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 50%.

After such a large jump in price, Zhejiang XiaSha Precision Manufacturing may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 71.6x, since almost half of all companies in China have P/E ratios under 36x and even P/E's lower than 20x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

As an illustration, earnings have deteriorated at Zhejiang XiaSha Precision Manufacturing over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Zhejiang XiaSha Precision Manufacturing

Although there are no analyst estimates available for Zhejiang XiaSha Precision Manufacturing, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

Zhejiang XiaSha Precision Manufacturing's P/E ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 34%. The last three years don't look nice either as the company has shrunk EPS by 47% in aggregate. 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 38% 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 Zhejiang XiaSha Precision 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. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Zhejiang XiaSha Precision Manufacturing's P/E

The strong share price surge has got Zhejiang XiaSha Precision Manufacturing's P/E rushing to great heights as well. 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 XiaSha Precision Manufacturing currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Zhejiang XiaSha Precision Manufacturing you should be aware of, and 1 of them shouldn't be ignored.

If these risks are making you reconsider your opinion on Zhejiang XiaSha Precision 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.