There wouldn't be many who think Xinyi Energy Holdings Limited's (HKG:3868) price-to-earnings (or "P/E") ratio of 11.3x is worth a mention when the median P/E in Hong Kong is similar at about 13x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/E.
With earnings growth that's superior to most other companies of late, Xinyi Energy Holdings has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.
View our latest analysis for Xinyi Energy Holdings
How Is Xinyi Energy Holdings' Growth Trending?
There's an inherent assumption that a company should be matching the market for P/E ratios like Xinyi Energy Holdings' to be considered reasonable.
Retrospectively, the last year delivered a decent 13% gain to the company's bottom line. Ultimately though, it couldn't turn around the poor performance of the prior period, with EPS shrinking 30% 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.
Looking ahead now, EPS is anticipated to climb by 7.8% each year during the coming three years according to the eight analysts following the company. That's shaping up to be materially lower than the 13% per annum growth forecast for the broader market.
With this information, we find it interesting that Xinyi Energy Holdings is trading at a fairly similar P/E to the market. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/E falls to levels more in line with the growth outlook.
What We Can Learn From Xinyi Energy Holdings' P/E?
We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Xinyi Energy Holdings' analyst forecasts revealed that its inferior earnings outlook isn't impacting its P/E as much as we would have predicted. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Before you settle on your opinion, we've discovered 2 warning signs for Xinyi Energy Holdings (1 is significant!) that you should be aware of.
Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.
Valuation is complex, but we're here to simplify it.
Discover if Xinyi Energy Holdings might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.