Despite an already strong run, Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.
In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 33x, you may still consider Shenzhen Kinwong Electronic as an attractive investment with its 22.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.
Shenzhen Kinwong Electronic hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. It seems that many are expecting the dour earnings performance to persist, which has repressed the P/E. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
What Are Growth Metrics Telling Us About The Low P/E?
Shenzhen Kinwong Electronic'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.
Retrospectively, the last year delivered a frustrating 13% decrease to the company's bottom line. At least EPS has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 24% per annum over the next three years. With the market predicted to deliver 25% growth per annum, the company is positioned for a comparable earnings result.
In light of this, it's peculiar that Shenzhen Kinwong Electronic's P/E sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.
What We Can Learn From Shenzhen Kinwong Electronic's P/E?
The latest share price surge wasn't enough to lift Shenzhen Kinwong Electronic's P/E close to the market median. 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 Shenzhen Kinwong Electronic currently trades on a lower than expected P/E since its forecast growth is in line with the wider market. There could be some unobserved threats to earnings preventing the P/E ratio from matching the outlook. At least the risk of a price drop looks to be subdued, but investors seem to think future earnings could see some volatility.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Shenzhen Kinwong Electronic that you should be aware of.
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).
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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.