Suzhou Xianglou New Material Co., Ltd.'s (SZSE:301160) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Suzhou Xianglou New Material Co., Ltd. (SZSE:301160) shareholders have had their patience rewarded with a 27% share price jump in the last month. The last month tops off a massive increase of 123% in the last year.

In spite of the firm bounce in price, Suzhou Xianglou New Material may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 28.3x, since almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 71x are not unusual. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

Recent times have been pleasing for Suzhou Xianglou New Material as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for Suzhou Xianglou New Material

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Suzhou Xianglou New Material.

Is There Any Growth For Suzhou Xianglou New Material?

There's an inherent assumption that a company should underperform the market for P/E ratios like Suzhou Xianglou New Material's to be considered reasonable.

If we review the last year of earnings growth, the company posted a worthy increase of 9.5%. EPS has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the earnings growth recently has been respectable for the company.

Shifting to the future, estimates from the one analyst covering the company suggest earnings should grow by 7.1% over the next year. Meanwhile, the rest of the market is forecast to expand by 38%, which is noticeably more attractive.

In light of this, it's understandable that Suzhou Xianglou New Material's P/E sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

Suzhou Xianglou New Material's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Suzhou Xianglou New Material's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

Before you take the next step, you should know about the 3 warning signs for Suzhou Xianglou New Material (2 shouldn't be ignored!) that we have uncovered.

If you're unsure about the strength of Suzhou Xianglou New Material'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.