Qifeng New Material Co., Ltd.'s (SZSE:002521) Share Price Boosted 37% But Its Business Prospects Need A Lift Too

Qifeng New Material Co., Ltd. (SZSE:002521) shareholders would be excited to see that the share price has had a great month, posting a 37% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 74%.

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 34x, you may still consider Qifeng New Material as an attractive investment with its 20.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Qifeng New Material certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, 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.

See our latest analysis for Qifeng New Material

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Is There Any Growth For Qifeng New Material?

In order to justify its P/E ratio, Qifeng New Material would need to produce sluggish growth that's trailing the market.

If we review the last year of earnings growth, the company posted a terrific increase of 485%. As a result, it also grew EPS by 16% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

This is in contrast to the rest of the market, which is expected to grow by 37% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Qifeng New Material is trading at a P/E lower than the market. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Final Word

The latest share price surge wasn't enough to lift Qifeng New Material's P/E close to the market median. 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.

As we suspected, our examination of Qifeng New Material revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 1 warning sign for Qifeng New Material that you should be aware of.

If you're unsure about the strength of Qifeng New Material'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.