There's No Escaping Xiamen Tungsten Co.,Ltd.'s (SHSE:600549) Muted Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Xiamen Tungsten Co.,Ltd. (SHSE:600549) as an attractive investment with its 15.1x 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, Xiamen TungstenLtd 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Xiamen TungstenLtd's Growth Trending?

In order to justify its P/E ratio, Xiamen TungstenLtd would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a decent 5.1% gain to the company's bottom line. Pleasingly, EPS has also lifted 85% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 13% each year during the coming three years according to the two analysts following the company. That's shaping up to be materially lower than the 24% each year growth forecast for the broader market.

With this information, we can see why Xiamen TungstenLtd is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Xiamen TungstenLtd's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Xiamen TungstenLtd maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Xiamen TungstenLtd, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Xiamen TungstenLtd, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com