Further Upside For Wuxi Paike New Materials Technology Co.,Ltd. (SHSE:605123) Shares Could Introduce Price Risks After 33% Bounce

Wuxi Paike New Materials Technology Co.,Ltd. (SHSE:605123) shares have had a really impressive month, gaining 33% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 27% over that time.

Even after such a large jump in price, Wuxi Paike New Materials TechnologyLtd may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 20.3x, since almost half of all companies in China have P/E ratios greater than 32x and even P/E's higher than 62x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times haven't been advantageous for Wuxi Paike New Materials TechnologyLtd as its earnings have been falling quicker than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. You'd much rather the company wasn't bleeding earnings if you still believe in the business. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

View our latest analysis for Wuxi Paike New Materials TechnologyLtd

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Is There Any Growth For Wuxi Paike New Materials TechnologyLtd?

In order to justify its P/E ratio, Wuxi Paike New Materials TechnologyLtd would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 37%. Regardless, EPS has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 22% each year over the next three years. That's shaping up to be materially higher than the 18% per annum growth forecast for the broader market.

With this information, we find it odd that Wuxi Paike New Materials TechnologyLtd 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 Key Takeaway

Wuxi Paike New Materials TechnologyLtd's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 Wuxi Paike New Materials TechnologyLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

Having said that, be aware Wuxi Paike New Materials TechnologyLtd is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Wuxi Paike New Materials TechnologyLtd's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.