Investors Still Waiting For A Pull Back In Xi'an Actionpower Electric Co., Ltd. (SHSE:688719)

Xi'an Actionpower Electric Co., Ltd.'s (SHSE:688719) price-to-earnings (or "P/E") ratio of 41.5x might make it look like a sell right now compared to the market in China, where around half of the companies have P/E ratios below 34x and even P/E's below 20x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's as high as it is.

Xi'an Actionpower Electric has been struggling lately as its earnings have declined faster than most other companies. It might be that many expect the dismal earnings performance to recover substantially, which has kept the P/E from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

View our latest analysis for Xi'an Actionpower Electric

Keen to find out how analysts think Xi'an Actionpower Electric's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Xi'an Actionpower Electric's Growth Trending?

There's an inherent assumption that a company should outperform the market for P/E ratios like Xi'an Actionpower Electric's to be considered reasonable.

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 56%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 25% overall rise in EPS. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of earnings growth.

Looking ahead now, EPS is anticipated to climb by 110% during the coming year according to the three analysts following the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

With this information, we can see why Xi'an Actionpower Electric is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

As we suspected, our examination of Xi'an Actionpower Electric's analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Xi'an Actionpower Electric you should be aware of, and 1 of them doesn't sit too well with us.

Of course, you might also be able to find a better stock than Xi'an Actionpower Electric. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.