There wouldn’t be many who think RLX Technology Inc.’s (NYSE:RLX) price-to-earnings (or “P/E”) ratio of 13x is worth a mention when the median P/E in the United States is similar at about 15x. 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 superior to most other companies of late, RLX Technology has been doing relatively well. One possibility is that the P/E is moderate because investors think this strong earnings performance might be about to tail off. 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 RLX Technology
If you’d like to see what analysts are forecasting going forward, you should check out our free report on RLX Technology.
What Are Growth Metrics Telling Us About The P/E?
The only time you’d be comfortable seeing a P/E like RLX Technology’s is when the company’s growth is tracking the market closely.
If we review the last year of earnings growth, the company posted a terrific increase of 79%. Pleasingly, EPS has also lifted 4.105% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it’s fair to say the earnings growth recently has been superb for the company.
Looking ahead now, EPS is anticipated to slump, contracting by 36% during the coming year according to the twin analysts following the company. Meanwhile, the broader market is forecast to expand by 6.9%, which paints a poor picture.
In light of this, it’s somewhat alarming that RLX Technology’s P/E sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort’s pessimism and aren’t willing to let go of their stock right now. There’s a good chance these shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the negative growth outlook.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We’ve established that RLX Technology currently trades on a higher than expected P/E for a company whose earnings are forecast to decline. Right now we are uncomfortable with the P/E as the predicted future earnings are unlikely to support a more positive sentiment for long. Unless these conditions improve, it’s challenging to accept these prices as being reasonable.
There are also other vital risk factors to consider and we’ve discovered 4 warning signs for RLX Technology (3 are a bit concerning!) that you should be aware of before investing here.
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 P/E below 20x.
What are the risks and opportunities for RLX Technology?
Price-To-Earnings ratio (13x) is below the US market (14.9x)
Earnings grew by 67.1% over the past year
Earnings are forecast to decline by an average of 0.5% per year for the next 3 years
Highly volatile share price over the past 3 months
High level of non-cash earnings
Shareholders have been diluted in the past year
View all Risks and Rewards
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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.