Despite an already strong run, HeNan Splendor Science & Technology Co., Ltd. (SZSE:002296) shares have been powering on, with a gain of 25% in the last thirty days. Looking further back, the 24% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.
In spite of the firm bounce in price, HeNan Splendor Science & Technology's price-to-earnings (or "P/E") ratio of 21.7x 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 37x and even P/E's above 71x are quite common. However, the P/E might be low for a reason and it requires further investigation to determine if it's justified.
With earnings growth that's exceedingly strong of late, HeNan Splendor Science & Technology has been doing very well. One possibility is that the P/E is low because investors think this strong earnings growth might actually underperform the broader market in the near future. 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.
Is There Any Growth For HeNan Splendor Science & Technology?
The only time you'd be truly comfortable seeing a P/E as low as HeNan Splendor Science & Technology'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 63% last year. The strong recent performance means it was also able to grow EPS by 53% in total over the last three years. So we can start by confirming that the company has done a great job of growing earnings over that time.
Weighing that recent medium-term earnings trajectory against the broader market's one-year forecast for expansion of 39% shows it's noticeably less attractive on an annualised basis.
In light of this, it's understandable that HeNan Splendor Science & Technology's P/E sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.
The Bottom Line On HeNan Splendor Science & Technology's P/E
The latest share price surge wasn't enough to lift HeNan Splendor Science & Technology's P/E close to the market median. We'd say the price-to-earnings ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
As we suspected, our examination of HeNan Splendor Science & Technology revealed its three-year earnings trends are contributing to its low P/E, given they look worse than current market expectations. 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.
Having said that, be aware HeNan Splendor Science & Technology is showing 2 warning signs in our investment analysis, you should know about.
Of course, you might also be able to find a better stock than HeNan Splendor Science & Technology. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
