Xinyaqiang Silicon Chemistry Co.,Ltd (SHSE:603155) May Have Run Too Fast Too Soon With Recent 29% Price Plummet

Xinyaqiang Silicon Chemistry Co.,Ltd (SHSE:603155) shares have had a horrible month, losing 29% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 39% share price drop.

Although its price has dipped substantially, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 27x, you may still consider Xinyaqiang Silicon ChemistryLtd as a stock to potentially avoid with its 33.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/E.

For example, consider that Xinyaqiang Silicon ChemistryLtd's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is high because investors think the company will still do enough to outperform the broader market in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

View our latest analysis for Xinyaqiang Silicon ChemistryLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Xinyaqiang Silicon ChemistryLtd's earnings, revenue and cash flow.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Xinyaqiang Silicon ChemistryLtd would need to produce impressive growth in excess of the market.

Retrospectively, the last year delivered a frustrating 61% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 51% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

In light of this, it's alarming that Xinyaqiang Silicon ChemistryLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Xinyaqiang Silicon ChemistryLtd's P/E

There's still some solid strength behind Xinyaqiang Silicon ChemistryLtd's P/E, if not its share price lately. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Xinyaqiang Silicon ChemistryLtd revealed its shrinking earnings over the medium-term aren't impacting its high P/E anywhere near as much as we would have predicted, given the market is set to grow. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 4 warning signs we've spotted with Xinyaqiang Silicon ChemistryLtd (including 1 which is a bit concerning).

You might be able to find a better investment than Xinyaqiang Silicon ChemistryLtd. 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.