Wuxi Honghui New Materials Technology Co., Ltd.'s (SZSE:002802) Business Is Trailing The Market But Its Shares Aren't

There wouldn't be many who think Wuxi Honghui New Materials Technology Co., Ltd.'s (SZSE:002802) price-to-earnings (or "P/E") ratio of 37.9x is worth a mention when the median P/E in China is similar at about 35x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

For instance, Wuxi Honghui New Materials Technology's receding earnings in recent times would have to be some food for thought. One possibility is that the P/E is moderate because investors think the company might still do enough to be in line with the broader market in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

See our latest analysis for Wuxi Honghui New Materials Technology

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 Wuxi Honghui New Materials Technology's earnings, revenue and cash flow.

Is There Some Growth For Wuxi Honghui New Materials Technology?

In order to justify its P/E ratio, Wuxi Honghui New Materials Technology would need to produce growth that's similar to 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 6.0%. This means it has also seen a slide in earnings over the longer-term as EPS is down 30% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

With this information, we find it concerning that Wuxi Honghui New Materials Technology is trading at a fairly similar P/E to the market. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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 Wuxi Honghui New Materials Technology currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are uncomfortable with the P/E as this earnings performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

Having said that, be aware Wuxi Honghui New Materials Technology is showing 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If you're unsure about the strength of Wuxi Honghui New Materials Technology'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.