What You Can Learn From XDC Industries (Shenzhen) Limited's (SZSE:300615) P/EAfter Its 25% Share Price Crash

XDC Industries (Shenzhen) Limited (SZSE:300615) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 28% in that time.

Even after such a large drop in price, XDC Industries (Shenzhen) may still be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 32.1x, since almost half of all companies in China have P/E ratios under 29x and even P/E's lower than 18x are not unusual. However, the P/E might be high for a reason and it requires further investigation to determine if it's justified.

XDC Industries (Shenzhen) has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is high because investors think this respectable earnings growth will be enough to outperform the broader market in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

View our latest analysis for XDC Industries (Shenzhen)

Although there are no analyst estimates available for XDC Industries (Shenzhen), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is XDC Industries (Shenzhen)'s Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as XDC Industries (Shenzhen)'s is when the company's growth is on track to outshine the market.

If we review the last year of earnings growth, the company posted a terrific increase of 28%. Pleasingly, EPS has also lifted 949% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

This is in contrast to the rest of the market, which is expected to grow by 35% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why XDC Industries (Shenzhen) is trading at such a high P/E compared to the market. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the bourse.

The Bottom Line On XDC Industries (Shenzhen)'s P/E

Despite the recent share price weakness, XDC Industries (Shenzhen)'s P/E remains higher than most other companies. 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 XDC Industries (Shenzhen) revealed its three-year earnings trends are contributing to its high P/E, given they look better than current market expectations. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for XDC Industries (Shenzhen) that you should be aware of.

If these risks are making you reconsider your opinion on XDC Industries (Shenzhen), explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.