Xinyi Glass Holdings Limited's (HKG:868) Price Is Right But Growth Is Lacking After Shares Rocket 31%

Xinyi Glass Holdings Limited (HKG:868) shareholders would be excited to see that the share price has had a great month, posting a 31% gain and recovering from prior weakness. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 8.7% in the last twelve months.

In spite of the firm bounce in price, given about half the companies in Hong Kong have price-to-earnings ratios (or "P/E's") above 10x, you may still consider Xinyi Glass Holdings as an attractive investment with its 6.6x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

Xinyi Glass Holdings certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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How Is Xinyi Glass Holdings' Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Xinyi Glass Holdings' is when the company's growth is on track to lag the market.

Retrospectively, the last year delivered an exceptional 46% gain to the company's bottom line. However, this wasn't enough as the latest three year period has seen a very unpleasant 45% drop in EPS in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should bring diminished returns, with earnings decreasing 1.1% per year as estimated by the twelve analysts watching the company. With the market predicted to deliver 12% growth per year, that's a disappointing outcome.

In light of this, it's understandable that Xinyi Glass Holdings' P/E would sit below the majority of other companies. However, shrinking earnings are unlikely to lead to a stable P/E over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Bottom Line On Xinyi Glass Holdings' P/E

Despite Xinyi Glass Holdings' shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As we suspected, our examination of Xinyi Glass Holdings' analyst forecasts revealed that its outlook for shrinking earnings is contributing to its low P/E. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Xinyi Glass Holdings (1 makes us a bit uncomfortable!) that you should be aware of.

If these risks are making you reconsider your opinion on Xinyi Glass Holdings, 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.