There's Reason For Concern Over Suzhou Xingye Materials Technology Co.,Ltd.'s (SHSE:603928) Massive 29% Price Jump

The Suzhou Xingye Materials Technology Co.,Ltd. (SHSE:603928) share price has done very well over the last month, posting an excellent gain of 29%. Unfortunately, despite the strong performance over the last month, the full year gain of 2.1% isn't as attractive.

Since its price has surged higher, given around half the companies in China have price-to-earnings ratios (or "P/E's") below 36x, you may consider Suzhou Xingye Materials TechnologyLtd as a stock to potentially avoid with its 54.3x 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 Suzhou Xingye Materials TechnologyLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for Suzhou Xingye Materials TechnologyLtd

Although there are no analyst estimates available for Suzhou Xingye Materials TechnologyLtd, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Does Growth Match The High P/E?

In order to justify its P/E ratio, Suzhou Xingye Materials TechnologyLtd would need to produce impressive growth in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 48%. The last three years don't look nice either as the company has shrunk EPS by 51% in aggregate. Therefore, it's fair to say the earnings growth recently has been undesirable for the company.

Comparing that to the market, which is predicted to deliver 41% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we find it concerning that Suzhou Xingye Materials TechnologyLtd is trading at a P/E higher than the market. 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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Bottom Line On Suzhou Xingye Materials TechnologyLtd's P/E

Suzhou Xingye Materials TechnologyLtd's P/E is getting right up there since its shares have risen strongly. 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.

We've established that Suzhou Xingye Materials TechnologyLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Suzhou Xingye Materials TechnologyLtd (at least 1 which is potentially serious), and understanding these should be part of your investment process.

Of course, you might also be able to find a better stock than Suzhou Xingye Materials TechnologyLtd. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.