Those holding Xin Yuan Enterprises Group Limited (HKG:1748) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 60% share price drop in the last twelve months.
Even after such a large jump in price, Xin Yuan Enterprises Group may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 7.4x, since almost half of all companies in Hong Kong have P/E ratios greater than 10x and even P/E's higher than 20x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Xin Yuan Enterprises Group has been doing a good job lately as it's been growing earnings at a solid pace. One possibility is that the P/E is low because investors think this respectable earnings growth might actually underperform the broader market in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.
See our latest analysis for Xin Yuan Enterprises Group
Does Growth Match The Low P/E?
There's an inherent assumption that a company should underperform the market for P/E ratios like Xin Yuan Enterprises Group's to be considered reasonable.
If we review the last year of earnings growth, the company posted a worthy increase of 15%. The latest three year period has also seen an excellent 169% overall rise in EPS, aided somewhat by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
Comparing that to the market, which is only predicted to deliver 21% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised earnings results.
With this information, we find it odd that Xin Yuan Enterprises Group is trading at a P/E lower than the market. It looks like most investors are not convinced the company can maintain its recent growth rates.
The Key Takeaway
Despite Xin Yuan Enterprises Group's shares building up a head of steam, its P/E still lags most other companies. It's argued the price-to-earnings ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We've established that Xin Yuan Enterprises Group currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Xin Yuan Enterprises Group, and understanding should be part of your investment process.
It's important to make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and 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.