Market Participants Recognise Li Auto Inc.'s (NASDAQ:LI) Earnings Pushing Shares 31% Higher

Li Auto Inc. (NASDAQ:LI) shares have continued their recent momentum with a 31% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 28% over that time.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Li Auto's P/E ratio of 17.7x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 18x. While this might not raise any eyebrows, if the P/E ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Recent times have been pleasing for Li Auto as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is moderate because investors think the company's earnings will be less resilient moving forward. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

See our latest analysis for Li Auto

Keen to find out how analysts think Li Auto's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Li Auto's Growth Trending?

In order to justify its P/E ratio, Li Auto would need to produce growth that's similar to the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 446% last year. Still, EPS has barely risen at all from three years ago in total, which is not ideal. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 11% per annum over the next three years. That's shaping up to be similar to the 10% per annum growth forecast for the broader market.

In light of this, it's understandable that Li Auto's P/E sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Li Auto's P/E

Its shares have lifted substantially and now Li Auto's P/E is also back up to the market median. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Li Auto's analyst forecasts revealed that its market-matching earnings outlook is contributing to its current P/E. At this stage investors feel the potential for an improvement or deterioration in earnings isn't great enough to justify a high or low P/E ratio. Unless these conditions change, they will continue to support the share price at these levels.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Li Auto with six simple checks.

If you're unsure about the strength of Li Auto's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.