There's No Escaping Xi'an Triangle Defense Co.,Ltd's (SZSE:300775) Muted Earnings Despite A 36% Share Price Rise

Despite an already strong run, Xi'an Triangle Defense Co.,Ltd (SZSE:300775) shares have been powering on, with a gain of 36% in the last thirty days. 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.

Although its price has surged higher, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Xi'an Triangle DefenseLtd as an attractive investment with its 23.1x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With earnings growth that's superior to most other companies of late, Xi'an Triangle DefenseLtd has been doing relatively well. It might be that many expect the strong earnings performance to degrade substantially, 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 Xi'an Triangle DefenseLtd

Keen to find out how analysts think Xi'an Triangle DefenseLtd's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Xi'an Triangle DefenseLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like Xi'an Triangle DefenseLtd's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 6.2% last year. Pleasingly, EPS has also lifted 207% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 20% each year over the next three years. That's shaping up to be materially lower than the 26% each year growth forecast for the broader market.

With this information, we can see why Xi'an Triangle DefenseLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Xi'an Triangle DefenseLtd's P/E?

Despite Xi'an Triangle DefenseLtd's shares building up a head of steam, its P/E still lags most other companies. 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 Xi'an Triangle DefenseLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Xi'an Triangle DefenseLtd that you should be aware of.

You might be able to find a better investment than Xi'an Triangle DefenseLtd. 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.