Xtep International Holdings Limited's (HKG:1368) Shares May Have Run Too Fast Too Soon

It's not a stretch to say that Xtep International Holdings Limited's (HKG:1368) price-to-earnings (or "P/E") ratio of 10.9x right now seems quite "middle-of-the-road" compared to the market in Hong Kong, where the median P/E ratio is around 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.

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Xtep International Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is moderate because investors think this poor earnings performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

Check out our latest analysis for Xtep International Holdings

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What Are Growth Metrics Telling Us About The P/E?

There's an inherent assumption that a company should be matching the market for P/E ratios like Xtep International Holdings' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 8.4% decrease to the company's bottom line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 18% overall rise in EPS. So we can start by confirming that the company has generally done a good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 5.5% per year during the coming three years according to the analysts following the company. With the market predicted to deliver 14% growth per annum, the company is positioned for a weaker earnings result.

With this information, we find it interesting that Xtep International Holdings is trading at a fairly similar P/E to the market. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of earnings growth is likely to weigh down the shares eventually.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Xtep International Holdings currently trades on a higher than expected P/E since its forecast growth is lower than the wider market. Right now we are uncomfortable with the P/E as the predicted future earnings aren't likely to support a more positive sentiment for long. Unless these conditions improve, it's challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Xtep International Holdings you should know about.

You might be able to find a better investment than Xtep International Holdings. If you want a selection of possible candidates, check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.