Improved Earnings Required Before Suzhou Xianglou New Material Co., Ltd. (SZSE:301160) Stock's 26% Jump Looks Justified

Suzhou Xianglou New Material Co., Ltd. (SZSE:301160) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 73% in the last year.

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 38x, you may still consider Suzhou Xianglou New Material as an attractive investment with its 28.4x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Suzhou Xianglou New Material has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

View our latest analysis for Suzhou Xianglou New Material

Keen to find out how analysts think Suzhou Xianglou New Material's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Growth For Suzhou Xianglou New Material?

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

Taking a look back first, we see that the company managed to grow earnings per share by a handy 9.5% last year. The solid recent performance means it was also able to grow EPS by 21% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 7.1% as estimated by the sole analyst watching the company. With the market predicted to deliver 38% growth , the company is positioned for a weaker earnings result.

In light of this, it's understandable that Suzhou Xianglou New Material's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Suzhou Xianglou New Material's P/E

Despite Suzhou Xianglou New Material's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Suzhou Xianglou New Material maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. 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 - Suzhou Xianglou New Material has 4 warning signs (and 2 which are potentially serious) we think you should know about.

If these risks are making you reconsider your opinion on Suzhou Xianglou New Material, 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.