The (NYSE:RLX) price-to-earnings (or “P/E”) ratio of 19.8x might make it look like a bargain right now, compared to the market in the United States, where about half of the companies have P/E ratios below 17x, and even P/E ratios below 10x are quite common. Still, we’d have to dig a little deeper to determine if there’s a rational basis for the elevated P/E ratio.
RLX Technology has certainly done well recently, as its earnings growth has been positive while most other companies’ earnings have been declining. The P/E ratio is probably high because investors believe the company will continue to weather the general market headwinds better than most. You’d hope so, otherwise you’ll be paying a pretty high price for no particular reason.
Check out our latest analysis for RLX Technology
Do you want to know how analysts assess the future of RLX Technology compared to the industry? In this case, our free Report is a good starting point.
How is RLX Technology growing?
RLX Technology’s P/E ratio would be typical of a company expected to deliver solid growth and, more importantly, outperform the market.
Looking back, last year saw a decent 8.2% increase in earnings for the company. However, due to the less impressive performance prior to that period, EPS growth over the last three years as a whole has been virtually non-existent. Accordingly, shareholders would probably not have been too happy with the unstable medium-term growth rates.
Looking ahead, the five analysts covering the company expect earnings to grow 20% per year over the next three years. With the market only forecast to grow at 11% per year, the company is poised for stronger results.
With this in mind, it’s understandable that RLX Technology’s P/E ratio is higher than most other companies. It seems shareholders aren’t interested in selling something that potentially has a better future ahead of it.
The most important things to take away
Although the price-earnings ratio should not be the deciding factor in whether or not you buy a stock, it is still a useful indicator of earnings expectations.
We have noted that RLX Technology maintains its high P/E ratio because its forecast growth is expected to be higher than the wider market. Currently, shareholders are happy with the P/E ratio because they are fairly confident that future earnings are not at risk. Under these circumstances, it is difficult to imagine the share price falling much in the near future.
Many other significant risk factors can be found in the company’s balance sheet. Our free Using the balance sheet analysis for RLX Technology with six simple checks, you can identify potential risks.
If you are interested in P/E ratiosyou might want to see this free Collection of other companies with strong earnings growth and low P/E ratios.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
