Earnings Not Telling The Story For Xinjiang Haoyuan Natural Gas Co., Ltd. (SZSE:002700) After Shares Rise 25%

Despite an already strong run, Xinjiang Haoyuan Natural Gas Co., Ltd. (SZSE:002700) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 126% in the last year.

After such a large jump in price, Xinjiang Haoyuan Natural Gas may be sending bearish signals at the moment with its price-to-earnings (or "P/E") ratio of 41.6x, since almost half of all companies in China have P/E ratios under 28x and even P/E's lower than 16x 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 as high as it is.

Xinjiang Haoyuan Natural Gas 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.

Check out our latest analysis for Xinjiang Haoyuan Natural Gas

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Xinjiang Haoyuan Natural Gas will help you shine a light on its historical performance.

How Is Xinjiang Haoyuan Natural Gas' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as high as Xinjiang Haoyuan Natural Gas' is when the company's growth is on track to outshine the market.

Retrospectively, the last year delivered an exceptional 27% gain to the company's bottom line. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that earnings growth has been inconsistent recently for the company.

Comparing that to the market, which is predicted to deliver 36% growth in the next 12 months, the company's momentum is weaker based on recent medium-term annualised earnings results.

With this information, we find it concerning that Xinjiang Haoyuan Natural Gas is trading at a P/E higher than the market. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with recent growth rates.

The Bottom Line On Xinjiang Haoyuan Natural Gas' P/E

The large bounce in Xinjiang Haoyuan Natural Gas' shares has lifted the company's P/E to a fairly high level. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Xinjiang Haoyuan Natural Gas revealed its three-year earnings trends aren't impacting its high P/E anywhere near as much as we would have predicted, given they look worse than current market expectations. Right now we are increasingly uncomfortable with the high P/E as this earnings performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Xinjiang Haoyuan Natural Gas that you should be aware of.

Of course, you might also be able to find a better stock than Xinjiang Haoyuan Natural Gas. 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.

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