Insufficient Growth At Xinjiang Daqo New Energy Co.,Ltd. (SHSE:688303) Hampers Share Price

With a price-to-earnings (or "P/E") ratio of 10.3x Xinjiang Daqo New Energy Co.,Ltd. (SHSE:688303) may be sending very bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 57x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

While the market has experienced earnings growth lately, Xinjiang Daqo New EnergyLtd's earnings have gone into reverse gear, which is not great. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Xinjiang Daqo New EnergyLtd

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How Is Xinjiang Daqo New EnergyLtd's Growth Trending?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Xinjiang Daqo New EnergyLtd's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 71%. However, a few very strong years before that means that it was still able to grow EPS by an impressive 290% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 19% each year growth forecast for the broader market.

In light of this, it's understandable that Xinjiang Daqo New EnergyLtd'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.

What We Can Learn From Xinjiang Daqo New EnergyLtd's P/E?

We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Xinjiang Daqo New EnergyLtd 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. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Xinjiang Daqo New EnergyLtd.

If P/E ratios interest you, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.