Xiamen Faratronic Co., Ltd. (SHSE:600563) Surges 32% Yet Its Low P/E Is No Reason For Excitement

The Xiamen Faratronic Co., Ltd. (SHSE:600563) share price has done very well over the last month, posting an excellent gain of 32%. Taking a wider view, although not as strong as the last month, the full year gain of 23% is also fairly reasonable.

Although its price has surged higher, Xiamen Faratronic may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 25.7x, since almost half of all companies in China have P/E ratios greater than 34x and even P/E's higher than 67x 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 limited.

Recent times haven't been advantageous for Xiamen Faratronic as its earnings have been falling quicker than most other companies. The P/E is probably low because investors think this poor earnings performance isn't going to improve at all. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.

See our latest analysis for Xiamen Faratronic

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What Are Growth Metrics Telling Us About The Low P/E?

Xiamen Faratronic's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

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 4.6%. Still, the latest three year period has seen an excellent 47% overall rise in EPS, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Shifting to the future, estimates from the nine analysts covering the company suggest earnings should grow by 16% per annum over the next three years. With the market predicted to deliver 18% growth per annum, the company is positioned for a weaker earnings result.

With this information, we can see why Xiamen Faratronic is trading at a P/E lower than the market. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Xiamen Faratronic's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Xiamen Faratronic maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Xiamen Faratronic with six simple checks will allow you to discover any risks that could be an issue.

If you're unsure about the strength of Xiamen Faratronic'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.