Market Might Still Lack Some Conviction On Xiamen R&T Plumbing Technology Co.,Ltd. (SZSE:002790) Even After 33% Share Price Boost

Xiamen R&T Plumbing Technology Co.,Ltd. (SZSE:002790) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 30% over that time.

Although its price has surged higher, Xiamen R&T Plumbing TechnologyLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 18.6x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 65x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Xiamen R&T Plumbing TechnologyLtd has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Xiamen R&T Plumbing TechnologyLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xiamen R&T Plumbing TechnologyLtd.

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

There's an inherent assumption that a company should underperform the market for P/E ratios like Xiamen R&T Plumbing TechnologyLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 18% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 52% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 17% each year as estimated by the five analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 19% per annum, which is not materially different.

With this information, we find it odd that Xiamen R&T Plumbing TechnologyLtd is trading at a P/E lower than the market. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

Xiamen R&T Plumbing TechnologyLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

Our examination of Xiamen R&T Plumbing TechnologyLtd'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.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Xiamen R&T Plumbing TechnologyLtd you should know about.

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.