SAN BIAN SCIENCE& TECHNOLOGY Co., LTD. (SZSE:002112) shares have continued their recent momentum with a 29% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.3% over the last year.
Although its price has surged higher, SAN BIAN SCIENCE& TECHNOLOGY's price-to-earnings (or "P/E") ratio of 24.8x might still make it look like a buy right now compared to the market in China, where around half of the companies have P/E ratios above 33x and even P/E's above 61x are quite common. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.
SAN BIAN SCIENCE& TECHNOLOGY certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. If you 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.
What Are Growth Metrics Telling Us About The Low P/E?
In order to justify its P/E ratio, SAN BIAN SCIENCE& TECHNOLOGY would need to produce sluggish growth that's trailing the market.
Retrospectively, the last year delivered an exceptional 122% gain to the company's bottom line. The latest three year period has also seen an excellent 238% overall rise in EPS, aided by its short-term performance. Therefore, it's fair to say the earnings growth recently has been superb for the company.
This is in contrast to the rest of the market, which is expected to grow by 38% over the next year, materially lower than the company's recent medium-term annualised growth rates.
In light of this, it's peculiar that SAN BIAN SCIENCE& TECHNOLOGY's P/E sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
The Key Takeaway
Despite SAN BIAN SCIENCE& TECHNOLOGY's shares building up a head of steam, its P/E still lags most other companies. Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
Our examination of SAN BIAN SCIENCE& TECHNOLOGY revealed its three-year earnings trends aren't contributing to its P/E anywhere near as much as we would have predicted, given they look better than current market expectations. When we see strong earnings with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. It appears many are indeed anticipating earnings instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with SAN BIAN SCIENCE& TECHNOLOGY, and understanding these should be part of your investment process.
Of course, you might also be able to find a better stock than SAN BIAN SCIENCE& 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.
