When close to half the companies in China have price-to-earnings ratios (or "P/E's") above 29x, you may consider Shenzhen KSTAR Science and Technology Co., Ltd. (SZSE:002518) as a highly attractive investment with its 13.2x P/E ratio. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's so limited.

Shenzhen KSTAR Science and Technology could be doing better as its earnings have been going backwards lately while most other companies have been seeing positive earnings growth. The P/E is probably low because investors think this poor earnings performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Does Growth Match The Low P/E?

There's an inherent assumption that a company should far underperform the market for P/E ratios like Shenzhen KSTAR Science and Technology's to be considered reasonable.

If we review the last year of earnings, dishearteningly the company's profits fell to the tune of 12%. Even so, admirably EPS has lifted 106% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing earnings over that time, even though it had some hiccups along the way.

Looking ahead now, EPS is anticipated to climb by 18% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the market is forecast to expand by 25% each year, which is noticeably more attractive.

In light of this, it's understandable that Shenzhen KSTAR Science and Technology'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 Bottom Line On Shenzhen KSTAR Science and Technology's P/E

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 KSTAR Science and Technology maintains its low P/E on the weakness of its forecast growth being lower than the wider market, 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.

You should always think about risks. Case in point, we've spotted 2 warning signs for Shenzhen KSTAR Science and Technology you should be aware of, and 1 of them is a bit concerning.

Of course, you might also be able to find a better stock than Shenzhen KSTAR Science and Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.

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