When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 36x, you may consider Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) as an attractive investment with its 18.6x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Shenzhen Kinwong Electronic has been doing quite well of late. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

See our latest analysis for Shenzhen Kinwong Electronic

Does Growth Match The Low P/E?

There's an inherent assumption that a company should underperform the market for P/E ratios like Shenzhen Kinwong Electronic's to be considered reasonable.

Taking a look back first, we see that the company managed to grow earnings per share by a handy 4.3% last year. EPS has also lifted 13% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing earnings over that time.

Turning to the outlook, the next year should generate growth of 33% as estimated by the three analysts watching the company. Meanwhile, the rest of the market is forecast to expand by 43%, which is noticeably more attractive.

In light of this, it's understandable that Shenzhen Kinwong Electronic's P/E sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Shenzhen Kinwong Electronic's analyst forecasts revealed that its inferior earnings outlook is contributing to its low P/E. 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.

You should always think about risks. Case in point, we've spotted 1 warning sign for Shenzhen Kinwong Electronic you should be aware of.

If you're unsure about the strength of Shenzhen Kinwong Electronic's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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.