Earnings Not Telling The Story For Qilian International Holding Group Limited (NASDAQ:QLI) After Shares Rise 79%

Qilian International Holding Group Limited (NASDAQ:QLI) shareholders are no doubt pleased to see that the share price has bounced 79% in the last month, although it is still struggling to make up recently lost ground. Notwithstanding the latest gain, the annual share price return of 4.4% isn't as impressive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Qilian International Holding Group's P/E ratio of 18.6x, since the median price-to-earnings (or "P/E") ratio in the United States is also close to 17x. 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.

With earnings growth that's exceedingly strong of late, Qilian International Holding Group has been doing very well. It might be that many expect the strong earnings performance to wane, which has kept the P/E from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

View our latest analysis for Qilian International Holding Group

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 Qilian International Holding Group's earnings, revenue and cash flow.

Is There Some Growth For Qilian International Holding Group?

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

Retrospectively, the last year delivered an exceptional 67% gain to the company's bottom line. Despite this strong recent growth, it's still struggling to catch up as its three-year EPS frustratingly shrank by 75% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 10% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

In light of this, it's somewhat alarming that Qilian International Holding Group's P/E sits in line with the majority of other companies. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a 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 Qilian International Holding Group's P/E?

Its shares have lifted substantially and now Qilian International Holding Group'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.

We've established that Qilian International Holding Group currently trades on a higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the moderate P/E lower. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Qilian International Holding Group (at least 2 which are a bit unpleasant), and understanding these should be part of your investment process.

If you're unsure about the strength of Qilian International Holding Group'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.