There's No Escaping Yongxing Special Materials Technology Co.,Ltd's (SZSE:002756) Muted Earnings Despite A 36% Share Price Rise

The Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) share price has done very well over the last month, posting an excellent gain of 36%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 5.9% in the last twelve months.

Although its price has surged higher, Yongxing Special Materials TechnologyLtd's price-to-earnings (or "P/E") ratio of 10x might still make it look like a strong buy right now compared to the market in China, where around half of the companies have P/E ratios above 34x and even P/E's above 64x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

Yongxing Special Materials TechnologyLtd has been struggling lately as its earnings have declined faster than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. You'd much rather the company wasn't bleeding earnings if you still believe in the business. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

See our latest analysis for Yongxing Special Materials TechnologyLtd

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Yongxing Special Materials TechnologyLtd.

Does Growth Match The Low P/E?

The only time you'd be truly comfortable seeing a P/E as depressed as Yongxing Special Materials TechnologyLtd's is when the company's growth is on track to lag the market decidedly.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 62%. Still, the latest three year period has seen an excellent 429% 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.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 6.8% each year as estimated by the six analysts watching the company. That's not great when the rest of the market is expected to grow by 19% each year.

With this information, we are not surprised that Yongxing Special Materials TechnologyLtd is trading at a P/E lower than the market. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Yongxing Special Materials TechnologyLtd's P/E

Yongxing Special Materials TechnologyLtd's recent share price jump still sees its P/E sitting firmly flat on the ground. 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 Yongxing Special Materials TechnologyLtd's analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Having said that, be aware Yongxing Special Materials TechnologyLtd is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

You might be able to find a better investment than Yongxing Special Materials TechnologyLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.