Take Care Before Diving Into The Deep End On Xiamen Xiangyu Co., Ltd. (SHSE:600057)

When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 32x, you may consider Xiamen Xiangyu Co., Ltd. (SHSE:600057) as a highly attractive investment with its 10.9x P/E ratio. However, the P/E might be quite low for a reason and it requires further investigation to determine if it's justified.

Xiamen Xiangyu has been struggling lately as its earnings have declined faster than most other companies. It seems that many are expecting the dismal earnings performance to persist, which has repressed the P/E. If you still like the company, you'd want its earnings trajectory to turn around before making any decisions. Or at the very least, you'd be hoping the earnings slide doesn't get any worse if your plan is to pick up some stock while it's out of favour.

View our latest analysis for Xiamen Xiangyu

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

Does Growth Match The Low P/E?

In order to justify its P/E ratio, Xiamen Xiangyu would need to produce anemic growth that's substantially trailing the market.

Retrospectively, the last year delivered a frustrating 32% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 33% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 102% as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 38% growth forecast for the broader market.

With this information, we find it odd that Xiamen Xiangyu is trading at a P/E lower than the market. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Bottom Line On Xiamen Xiangyu's P/E

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.

Our examination of Xiamen Xiangyu's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - Xiamen Xiangyu has 2 warning signs we think you should be aware of.

Of course, you might also be able to find a better stock than Xiamen Xiangyu. 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.