Shanghai Shuixing Home Textile Co., Ltd. (SHSE:603365) Shares Fly 26% But Investors Aren't Buying For Growth

Shanghai Shuixing Home Textile Co., Ltd. (SHSE:603365) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 3.6% in the last twelve months.

In spite of the firm bounce in price, Shanghai Shuixing Home Textile may still be sending very bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 10.7x, since almost half of all companies in China have P/E ratios greater than 30x and even P/E's higher than 58x 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 limited.

Shanghai Shuixing Home Textile certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shanghai Shuixing Home Textile

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shanghai Shuixing Home Textile's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 4.4%. However, due to its less than impressive performance prior to this period, EPS growth is practically non-existent over the last three years overall. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Shifting to the future, estimates from the two analysts covering the company suggest earnings should grow by 12% per annum over the next three years. That's shaping up to be materially lower than the 19% per annum growth forecast for the broader market.

In light of this, it's understandable that Shanghai Shuixing Home Textile's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Shanghai Shuixing Home Textile's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

As we suspected, our examination of Shanghai Shuixing Home Textile's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 2 warning signs for Shanghai Shuixing Home Textile that we have uncovered.

If these risks are making you reconsider your opinion on Shanghai Shuixing Home Textile, 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.