Yongxing Special Materials Technology Co.,Ltd's (SZSE:002756) Share Price Is Matching Sentiment Around Its Earnings

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 39x, you may consider Yongxing Special Materials Technology Co.,Ltd (SZSE:002756) as a highly attractive investment with its 14x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

With earnings that are retreating more than the market's of late, Yongxing Special Materials TechnologyLtd has been very sluggish. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. 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

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Does Growth Match The Low P/E?

In order to justify its P/E ratio, Yongxing Special Materials TechnologyLtd would need to produce anemic growth that's substantially trailing the market.

Taking a look back first, the company's earnings per share growth last year wasn't something to get excited about as it posted a disappointing decline of 74%. Even so, admirably EPS has lifted 129% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to slump, contracting by 13% during the coming year according to the six analysts following the company. With the market predicted to deliver 37% growth , that's a disappointing outcome.

With this information, we are not surprised that Yongxing Special Materials TechnologyLtd is trading at a P/E lower than the market. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

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.

We've established that Yongxing Special Materials TechnologyLtd maintains its low P/E on the weakness of its forecast for sliding earnings, as expected. 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.

You need to take note of risks, for example - Yongxing Special Materials TechnologyLtd has 2 warning signs (and 1 which is significant) we think you should know about.

If these risks are making you reconsider your opinion on Yongxing Special Materials TechnologyLtd, 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.