Risks To Shareholder Returns Are Elevated At These Prices For Xinjiang Yilite Industry Co.,Ltd (SHSE:600197)

There wouldn't be many who think Xinjiang Yilite Industry Co.,Ltd's (SHSE:600197) price-to-earnings (or "P/E") ratio of 29.9x is worth a mention when the median P/E in China is similar at about 32x. Although, it's not wise to simply ignore the P/E without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

With earnings growth that's superior to most other companies of late, Xinjiang Yilite IndustryLtd has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Xinjiang Yilite IndustryLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Xinjiang Yilite IndustryLtd.

Is There Some Growth For Xinjiang Yilite IndustryLtd?

The only time you'd be comfortable seeing a P/E like Xinjiang Yilite IndustryLtd's is when the company's growth is tracking the market closely.

If we review the last year of earnings growth, the company posted a terrific increase of 71%. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 29% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 23% per annum over the next three years. With the market predicted to deliver 26% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Xinjiang Yilite IndustryLtd is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.

The Key Takeaway

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 Xinjiang Yilite IndustryLtd currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Xinjiang Yilite IndustryLtd, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Xinjiang Yilite IndustryLtd, 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.