A Piece Of The Puzzle Missing From Longxing Chemical Stock Co., Ltd.'s (SZSE:002442) 27% Share Price Climb

Those holding Longxing Chemical Stock Co., Ltd. (SZSE:002442) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Although its price has surged higher, Longxing Chemical Stock's price-to-earnings (or "P/E") ratio of 19x 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 30x and even P/E's above 55x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

For example, consider that Longxing Chemical Stock's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Check out our latest analysis for Longxing Chemical Stock

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 Longxing Chemical Stock's earnings, revenue and cash flow.

Is There Any Growth For Longxing Chemical Stock?

The only time you'd be truly comfortable seeing a P/E as low as Longxing Chemical Stock's is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered a frustrating 7.2% decrease to the company's bottom line. Still, the latest three year period has seen an excellent 581% overall rise in EPS, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the earnings growth recently has been more than adequate for the company.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 41% shows it's noticeably more attractive on an annualised basis.

In light of this, it's peculiar that Longxing Chemical Stock'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 Bottom Line On Longxing Chemical Stock's P/E

Despite Longxing Chemical Stock's shares building up a head of steam, its P/E still lags most other companies. 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.

Our examination of Longxing Chemical Stock revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Longxing Chemical Stock (1 is significant!) that you need to be mindful of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.