What Daxin Materials Corporation's (TWSE:5234) 26% Share Price Gain Is Not Telling You

Daxin Materials Corporation (TWSE:5234) shares have had a really impressive month, gaining 26% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 54%.

Since its price has surged higher, Daxin Materials may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 34x, since almost half of all companies in Taiwan have P/E ratios under 21x and even P/E's lower than 15x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Recent times have been quite advantageous for Daxin Materials as its earnings have been rising very briskly. The P/E is probably high because investors think this strong 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.

View our latest analysis for Daxin Materials

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Daxin Materials' earnings, revenue and cash flow.

Is There Enough Growth For Daxin Materials?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Daxin Materials' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 43%. Still, incredibly EPS has fallen 15% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Weighing that medium-term earnings trajectory against the broader market's one-year forecast for expansion of 24% shows it's an unpleasant look.

In light of this, it's alarming that Daxin Materials' P/E sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

What We Can Learn From Daxin Materials' P/E?

Shares in Daxin Materials have built up some good momentum lately, which has really inflated its P/E. 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 Daxin Materials currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. Right now we are increasingly uncomfortable with the high P/E as this earnings performance is highly unlikely to support such positive sentiment for long. If recent medium-term earnings trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Daxin Materials is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.

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.

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

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.