Tianjin Saixiang Technology Co.,Ltd's (SZSE:002337) Shares Climb 35% But Its Business Is Yet to Catch Up

Tianjin Saixiang Technology Co.,Ltd (SZSE:002337) shares have continued their recent momentum with a 35% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Following the firm bounce in price, Tianjin Saixiang TechnologyLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 73.6x, since almost half of all companies in China have P/E ratios under 37x and even P/E's lower than 21x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For example, consider that Tianjin Saixiang TechnologyLtd'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.

View our latest analysis for Tianjin Saixiang TechnologyLtd

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How Is Tianjin Saixiang TechnologyLtd's Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Tianjin Saixiang TechnologyLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 32%. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. So it appears to us that the company has had a mixed result in terms of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 38% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

In light of this, it's alarming that Tianjin Saixiang TechnologyLtd's P/E sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

Tianjin Saixiang TechnologyLtd's P/E is flying high just like its stock has during the last month. 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.

Our examination of Tianjin Saixiang TechnologyLtd revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. 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.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Tianjin Saixiang TechnologyLtd that you should be aware of.

You might be able to find a better investment than Tianjin Saixiang TechnologyLtd. 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.