Edifier Technology Co., Ltd. (SZSE:002351) shares have had a really impressive month, gaining 44% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.
Although its price has surged higher, Edifier Technology's price-to-earnings (or "P/E") ratio of 25.3x 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 32x and even P/E's above 62x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
Recent times have been pleasing for Edifier Technology as its earnings have risen in spite of the market's earnings going into reverse. One possibility is that the P/E is low because investors think the company's earnings are going to fall away like everyone else's soon. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
How Is Edifier Technology's Growth Trending?
In order to justify its P/E ratio, Edifier Technology would need to produce sluggish growth that's trailing the market.
Taking a look back first, we see that the company grew earnings per share by an impressive 44% last year. The latest three year period has also seen a 25% overall rise in EPS, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth.
Shifting to the future, estimates from the dual analysts covering the company suggest earnings should grow by 23% per annum over the next three years. With the market only predicted to deliver 18% per year, the company is positioned for a stronger earnings result.
With this information, we find it odd that Edifier Technology 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.
What We Can Learn From Edifier Technology's P/E?
Despite Edifier Technology'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.
Our examination of Edifier Technology's analyst forecasts revealed that its superior earnings outlook isn't contributing to its P/E anywhere near as much as we would have predicted. When we see a strong earnings outlook with faster-than-market growth, we assume potential risks are what might be placing significant pressure on the P/E ratio. At least price risks look to be very low, but investors seem to think future earnings could see a lot of volatility.
It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Edifier Technology, and understanding should be part of your investment process.
Of course, you might also be able to find a better stock than Edifier Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
