Improved Earnings Required Before RLX Technology Inc. (NYSE:RLX) Stock's 84% Jump Looks Justified

RLX Technology Inc. (NYSE:RLX) shareholders would be excited to see that the share price has had a great month, posting a 84% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

Even after such a large jump in price, given close to half the companies in the United States have price-to-earnings ratios (or "P/E's") above 15x, you may still consider RLX Technology as an attractive investment with its 11.7x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

RLX Technology certainly has been doing a good job lately as it's been growing earnings more than most other companies. One possibility is that the P/E is low because investors think this strong earnings performance might be less impressive moving forward. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Check out our latest analysis for RLX Technology

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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 Low P/E?

RLX Technology's P/E ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the market.

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.

Turning to the outlook, the next year should bring diminished returns, with earnings decreasing 48% as estimated by the three analysts watching the company. That's not great when the rest of the market is expected to grow by 7.4%.

In light of this, it's understandable that RLX Technology's P/E would sit below the majority of other companies. Nonetheless, there's no guarantee the P/E has reached a floor yet with earnings going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

RLX Technology's stock might have been given a solid boost, but its P/E certainly hasn't reached any great heights. 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 maintains its low P/E on the weakness of its forecast for sliding earnings, 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. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider and we've discovered 4 warning signs for RLX Technology (3 make us uncomfortable!) that you should be aware of before investing here.

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

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.

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