Yechiu Metal Recycling (China) Ltd.'s (SHSE:601388) Shares Leap 26% Yet They're Still Not Telling The Full Story

Yechiu Metal Recycling (China) Ltd. (SHSE:601388) 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. 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, Yechiu Metal Recycling (China)'s price-to-earnings (or "P/E") ratio of 24.5x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 30x and even P/E's above 55x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With earnings that are retreating more than the market's of late, Yechiu Metal Recycling (China) has been very sluggish. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Yechiu Metal Recycling (China)

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Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Yechiu Metal Recycling (China)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 56% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 38% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Looking ahead now, EPS is anticipated to climb by 83% during the coming year according to the sole analyst following the company. With the market only predicted to deliver 41%, the company is positioned for a stronger earnings result.

With this information, we find it odd that Yechiu Metal Recycling (China) is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Final Word

Despite Yechiu Metal Recycling (China)'s shares building up a head of steam, its P/E still lags most other companies. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Yechiu Metal Recycling (China)'s analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Yechiu Metal Recycling (China), and understanding them should be part of your investment process.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on 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.