Qingdao Kutesmart Co.,Ltd. (SZSE:300840) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 25% over that time.

In spite of the firm bounce in price, given about half the companies in China have price-to-earnings ratios (or "P/E's") above 26x, you may still consider Qingdao KutesmartLtd as a highly attractive investment with its 12.6x 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.

Qingdao KutesmartLtd certainly has been doing a great job lately as it's been growing earnings at a really rapid pace. It might be that many expect the strong earnings performance to degrade substantially, which has repressed the P/E. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Is There Any Growth For Qingdao KutesmartLtd?

Qingdao KutesmartLtd's P/E ratio would be typical for a company that's expected to deliver very poor growth or even falling earnings, and importantly, perform much worse than the market.

Retrospectively, the last year delivered an exceptional 108% gain to the company's bottom line. Pleasingly, EPS has also lifted 276% in aggregate from three years ago, thanks to the last 12 months of growth. 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 37% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Qingdao KutesmartLtd'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

Even after such a strong price move, Qingdao KutesmartLtd's P/E still trails the rest of the market significantly. Typically, we'd caution against reading too much into price-to-earnings ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Qingdao KutesmartLtd currently trades on a much lower than expected P/E since its recent three-year growth is higher than the wider market forecast. There could be some major unobserved threats to earnings preventing the P/E ratio from matching this positive performance. 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 is also worth noting that we have found 2 warning signs for Qingdao KutesmartLtd (1 doesn't sit too well with us!) that you need to take into consideration.

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.