There's No Escaping Wetouch Technology Inc.'s (NASDAQ:WETH) Muted Earnings Despite A 35% Share Price Rise

The Wetouch Technology Inc. (NASDAQ:WETH) share price has done very well over the last month, posting an excellent gain of 35%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 31% in the last twelve months.

In spite of the firm bounce in price, Wetouch Technology's price-to-earnings (or "P/E") ratio of 2.4x might still make it look like a strong buy right now compared to the market in the United States, where around half of the companies have P/E ratios above 20x and even P/E's above 34x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/E.

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For example, consider that Wetouch Technology's financial performance has been poor lately as its earnings have been in decline. One possibility is that the P/E is low because investors think the company won't do enough to avoid underperforming the broader market in the near future. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

View our latest analysis for Wetouch Technology

Although there are no analyst estimates available for Wetouch Technology, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Wetouch Technology's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as depressed as Wetouch Technology's is when the company's growth is on track to lag the market decidedly.

Retrospectively, the last year delivered a frustrating 42% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 95% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Comparing that to the market, which is predicted to deliver 15% growth in the next 12 months, the company's downward momentum based on recent medium-term earnings results is a sobering picture.

With this information, we are not surprised that Wetouch Technology is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent earnings trends are already weighing down the shares.

The Key Takeaway

Wetouch Technology's recent share price jump still sees its P/E sitting firmly flat on the ground. 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.

We've established that Wetouch Technology maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn't great enough to justify a higher P/E ratio. If recent medium-term earnings trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - Wetouch Technology has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.

If these risks are making you reconsider your opinion on Wetouch Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.