Hubei Xiangyuan New Material Technology Inc.'s (SZSE:300980) 26% Share Price Surge Not Quite Adding Up

Hubei Xiangyuan New Material Technology Inc. (SZSE:300980) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 10% over that time.

Following the firm bounce in price, given close to half the companies in China have price-to-earnings ratios (or "P/E's") below 34x, you may consider Hubei Xiangyuan New Material Technology as a stock to avoid entirely with its 68.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so lofty.

For instance, Hubei Xiangyuan New Material Technology's receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Hubei Xiangyuan New Material 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 Hubei Xiangyuan New Material Technology's earnings, revenue and cash flow.

How Is Hubei Xiangyuan New Material Technology's Growth Trending?

In order to justify its P/E ratio, Hubei Xiangyuan New Material Technology would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 23%. This means it has also seen a slide in earnings over the longer-term as EPS is down 73% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 39% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's alarming that Hubei Xiangyuan New Material Technology's P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent earnings trends is likely to weigh heavily on the share price eventually.

The Final Word

Hubei Xiangyuan New Material Technology's P/E is flying high just like its stock has during the last month. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Hubei Xiangyuan New Material Technology currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Hubei Xiangyuan New Material Technology (of which 1 can't be ignored!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.