TES Touch Embedded Solutions (Xiamen) Co., Ltd. (SZSE:003019) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 51% in the last year.

Even after such a large jump in price, TES Touch Embedded Solutions (Xiamen) may still be sending bullish signals at the moment with its price-to-earnings (or "P/E") ratio of 22.8x, since almost half of all companies in China have P/E ratios greater than 33x and even P/E's higher than 63x are not unusual. Although, it's not wise to just take the P/E at face value as there may be an explanation why it's limited.

As an illustration, earnings have deteriorated at TES Touch Embedded Solutions (Xiamen) over the last year, which is not ideal at all. It might be that many expect the disappointing earnings performance to continue or accelerate, which has repressed the P/E. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

How Is TES Touch Embedded Solutions (Xiamen)'s Growth Trending?

In order to justify its P/E ratio, TES Touch Embedded Solutions (Xiamen) would need to produce sluggish growth that's trailing the market.

Retrospectively, the last year delivered a frustrating 14% decrease to the company's bottom line. Even so, admirably EPS has lifted 62% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would probably welcome the medium-term rates of earnings growth.

Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 38% shows it's noticeably less attractive on an annualised basis.

With this information, we can see why TES Touch Embedded Solutions (Xiamen) is trading at a P/E lower than the market. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the bourse.

The Final Word

Despite TES Touch Embedded Solutions (Xiamen)'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.

We've established that TES Touch Embedded Solutions (Xiamen) maintains its low P/E on the weakness of its recent three-year growth being lower than the wider market forecast, as expected. Right now shareholders are accepting the low P/E as they concede future earnings probably won't provide any pleasant surprises. If recent medium-term earnings trends continue, 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 - TES Touch Embedded Solutions (Xiamen) has 1 warning sign we think you should be aware of.

Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a low P/E.

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