Those holding Shenzhen Kinwong Electronic Co., Ltd. (SHSE:603228) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.
Although its price has surged higher, Shenzhen Kinwong Electronic may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 17.3x, since almost half of all companies in China have P/E ratios greater than 31x and even P/E's higher than 56x are not unusual. 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. 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 not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Shenzhen Kinwong Electronic's Growth Trending?
The only time you'd be truly comfortable seeing a P/E as low as Shenzhen Kinwong Electronic's is when the company's growth is on track to lag the market.
If we review the last year of earnings growth, the company posted a worthy increase of 4.3%. The latest three year period has also seen a 13% overall rise in EPS, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing earnings over that time.
Shifting to the future, estimates from the three analysts covering the company suggest earnings should grow by 33% over the next year. With the market predicted to deliver 41% growth , the company is positioned for a weaker earnings result.
With this information, we can see why Shenzhen Kinwong Electronic is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.
The Key Takeaway
Despite Shenzhen Kinwong Electronic's shares building up a head of steam, its P/E still lags most other companies. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.
We've established that Shenzhen Kinwong Electronic maintains its low P/E on the weakness of its forecast growth being lower than the wider market, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.
You always need to take note of risks, for example - Shenzhen Kinwong Electronic has 1 warning sign we think 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.