Optimistic Investors Push Jiangsu Xiehe Electronic Co.,Ltd. (SHSE:605258) Shares Up 31% But Growth Is Lacking

Despite an already strong run, Jiangsu Xiehe Electronic Co.,Ltd. (SHSE:605258) shares have been powering on, with a gain of 31% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

Since its price has surged higher, Jiangsu Xiehe ElectronicLtd may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 58.8x, since almost half of all companies in China have P/E ratios under 30x and even P/E's lower than 19x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

For example, consider that Jiangsu Xiehe ElectronicLtd's financial performance has been poor lately as its earnings have been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Check out our latest analysis for Jiangsu Xiehe ElectronicLtd

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jiangsu Xiehe ElectronicLtd's earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far outperform the market for P/E ratios like Jiangsu Xiehe ElectronicLtd's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. As a result, earnings from three years ago have also fallen 62% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's an unpleasant look.

In light of this, it's alarming that Jiangsu Xiehe ElectronicLtd's P/E sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

The Key Takeaway

The strong share price surge has got Jiangsu Xiehe ElectronicLtd's P/E rushing to great heights as well. 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.

We've established that Jiangsu Xiehe ElectronicLtd currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 3 warning signs we've spotted with Jiangsu Xiehe ElectronicLtd (including 1 which is a bit unpleasant).

You might be able to find a better investment than Jiangsu Xiehe ElectronicLtd. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.