Suzhou SONAVOX Electronics Co.,Ltd. (SHSE:688533) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 23% in the last twelve months.

Even after such a large jump in price, Suzhou SONAVOX ElectronicsLtd'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 30x and even P/E's above 58x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Suzhou SONAVOX ElectronicsLtd has been doing quite well of late. It might be that many expect the strong earnings performance to degrade substantially, possibly more than the market, which has repressed the P/E. 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.

How Is Suzhou SONAVOX ElectronicsLtd's Growth Trending?

The only time you'd be truly comfortable seeing a P/E as low as Suzhou SONAVOX ElectronicsLtd's is when the company's growth is on track to lag the market.

Taking a look back first, we see that the company grew earnings per share by an impressive 64% last year. The latest three year period has also seen an excellent 65% 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.

Shifting to the future, estimates from the four analysts covering the company suggest earnings should grow by 28% per year over the next three years. With the market only predicted to deliver 19% per year, the company is positioned for a stronger earnings result.

With this information, we find it odd that Suzhou SONAVOX ElectronicsLtd is trading at a P/E lower than the market. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

The latest share price surge wasn't enough to lift Suzhou SONAVOX ElectronicsLtd's P/E close to the market median. 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.

We've established that Suzhou SONAVOX ElectronicsLtd currently trades on a much lower than expected P/E since its forecast growth is higher than the wider market. There could be some major unobserved threats to earnings preventing the P/E ratio from matching the positive outlook. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Suzhou SONAVOX ElectronicsLtd (of which 1 can't be ignored!) you should know about.

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

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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.