Xi'an Manareco New Materials Co.,Ltd (SHSE:688550) Held Back By Insufficient Growth Even After Shares Climb 25%

The Xi'an Manareco New Materials Co.,Ltd (SHSE:688550) share price has done very well over the last month, posting an excellent gain of 25%. The last 30 days bring the annual gain to a very sharp 34%.

In spite of the firm bounce in price, Xi'an Manareco New MaterialsLtd's price-to-earnings (or "P/E") ratio of 27.6x 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 40x and even P/E's above 78x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Xi'an Manareco New MaterialsLtd certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, 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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What Are Growth Metrics Telling Us About The Low P/E?

In order to justify its P/E ratio, Xi'an Manareco New MaterialsLtd would need to produce sluggish growth that's trailing the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 91% last year. The latest three year period has also seen a 7.8% overall rise in EPS, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 12% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 37% growth forecast for the broader market.

With this information, we can see why Xi'an Manareco New MaterialsLtd is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Xi'an Manareco New MaterialsLtd's P/E?

The latest share price surge wasn't enough to lift Xi'an Manareco New MaterialsLtd's P/E close to the market median. 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.

We've established that Xi'an Manareco New MaterialsLtd 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Xi'an Manareco New MaterialsLtd has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Xi'an Manareco New MaterialsLtd, 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.