Investors Still Aren't Entirely Convinced By Xiangtan Electrochemical Scientific Co.,Ltd's (SZSE:002125) Earnings Despite 27% Price Jump

Xiangtan Electrochemical Scientific Co.,Ltd (SZSE:002125) shares have continued their recent momentum with a 27% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may still consider Xiangtan Electrochemical ScientificLtd as an attractive investment with its 19.8x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

The earnings growth achieved at Xiangtan Electrochemical ScientificLtd over the last year would be more than acceptable for most companies. It might be that many expect the respectable earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

View our latest analysis for Xiangtan Electrochemical ScientificLtd

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 Xiangtan Electrochemical ScientificLtd's earnings, revenue and cash flow.

Is There Any Growth For Xiangtan Electrochemical ScientificLtd?

There's an inherent assumption that a company should underperform the market for P/E ratios like Xiangtan Electrochemical ScientificLtd's to be considered reasonable.

Taking a look back first, we see that the company grew earnings per share by an impressive 27% last year. The strong recent performance means it was also able to grow EPS by 867% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Xiangtan Electrochemical ScientificLtd's P/E sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

The latest share price surge wasn't enough to lift Xiangtan Electrochemical ScientificLtd's P/E close to the market median. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Xiangtan Electrochemical ScientificLtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. At least price risks look to be very low if recent medium-term earnings trends continue, but investors seem to think future earnings could see a lot of volatility.

It is also worth noting that we have found 1 warning sign for Xiangtan Electrochemical ScientificLtd that you need to take into consideration.

If you're unsure about the strength of Xiangtan Electrochemical ScientificLtd'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.