A Piece Of The Puzzle Missing From Xi'an NovaStar Tech Co., Ltd.'s (SZSE:301589) Share Price

With a price-to-earnings (or "P/E") ratio of 25.4x Xi'an NovaStar Tech Co., Ltd. (SZSE:301589) may be sending bullish signals at the moment, given that almost half of all companies in China have P/E ratios greater than 37x and even P/E's higher than 71x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Recent times have been pleasing for Xi'an NovaStar Tech as its earnings have risen in spite of the market's earnings going into reverse. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

View our latest analysis for Xi'an NovaStar Tech

Want the full picture on analyst estimates for the company? Then our free report on Xi'an NovaStar Tech will help you uncover what's on the horizon.

Is There Any Growth For Xi'an NovaStar Tech?

Xi'an NovaStar Tech'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.

If we review the last year of earnings growth, the company posted a worthy increase of 3.4%. The latest three year period has also seen an excellent 130% overall rise in EPS, aided somewhat by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 45% as estimated by the three analysts watching the company. With the market only predicted to deliver 39%, the company is positioned for a stronger earnings result.

In light of this, it's peculiar that Xi'an NovaStar Tech's P/E sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What We Can Learn From Xi'an NovaStar Tech's P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Xi'an NovaStar Tech currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Xi'an NovaStar Tech (at least 1 which is potentially serious), and understanding these should be part of your investment process.

If you're unsure about the strength of Xi'an NovaStar Tech's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.